This year is increasingly shaping up to look like a breakout year for gold
The big story for investors in 2017 was the broad-based rally in stocks. Simply by owning equities of any shape or size, you likely made out very nicely.
Domestic large-cap stocks were up about 20% as measured by the S&P 500SPX, +0.03% Other markets did even better, with broad global funds like the Vanguard Total International ETF VXUS, +0.05% up about 25% and the popular iShares FTSE/Xinhua China 25 Index ETF FXI, +0.23% up about 37%.
And if you didn’t like stocks there was always bitcoin BTCUSD, -5.46% The cryptocurrency soared a staggering 15-fold over 2017.
Amid this risk-on rally, many investors likely overlooked gold US:GCG8
However, 2018 is increasingly shaping up to look like a breakout year for the precious metal. Here’s why:
A new floor: From a technical perspective, gold hasn’t looked this good in a long time. The precious metal has touched $1,350 an ounce a few times over the past few years and has been pretty stable between $1,200 and $1,250 since the last test of those highs back in September. We’ve yet to break out to the upside, but a clear pattern of higher lows is an incredibly encouraging sign that we’ve found a new floor for prices. And with recent moves up through the important round number of $1,300, there’s a good chance we keep powering higher.
Short-term momentum: Beyond this base, there’s encouraging momentum. Gold prices GLD, -0.18% are up roughly 6% in the last six months, which underperforms a gain of 11% for the S&P 500 but is still noteworthy. And since rolling back in early December, gold has surged more than 5% in just a few weeks while the S&P has barely budged.
Asset rotation: Many stock-market investors are still optimistic after a great run in 2017, but it’s undeniable that many traders are ready for what’s next now that tax reform is priced in and the big run for equities looks long in the tooth. It’s natural for the fast money to look for greener pastures when we’ve had a good run, and the turn of the year is a great excuse to move out of stocks and into something else.
Strong global demand: Aside from the charts and asset rotation, there is structural demand that will provide a lift for gold. For starters, look at India, where gold imports surged an amazing 67% in 2017. The nation is the No. 2 consumer gold market in the world behind China, so that’s an encouraging sign of retail demand. As for China, demand for gold bars through November was up 40% from a year earlier, according to gold portal Kitco. That speaks to strong momentum.
Weak production: Across 2017, gold mining GDX, -0.48% was incredibly anemic, prompting a report from ANZ that noted gold output was “at its lowest point since the financial crisis, with risks only getting greater.” There are a host of factors at play, from cash-strapped companies like Freeport McMoRan FCX, +0.25% closing underperforming sites to new regulatory policies for miners in Indonesia and South Africa. But the collective result is less gold coming out of the ground, which should benefit gold investors in 2018.