The gold market is kicking off 2018 with a bang, as the market seeks to move further away from previous resistance. The dollar index continues to slump in early trade, and has pushed the gold market to a multi-month high. Although there are a variety of issues that could affect gold prices in the New Year, a weaker dollar is likely to be a theme that is revisited often.
As the New Year gets under way, investors may start moving some capital around as they look to rebalance. Given the current geopolitical backdrop and significant stock market risk, gold and other perceived safe haven assets could potentially see substantial inflows, and the recent rally in gold could continue.
The dollar index had a very poor showing in 2017, declining by some 10 percent. This was the largest yearly loss since 2003, and the first losing year since 2012. The notion of higher rates and tax reforms has not provided an anticipated boost to the currency, and it may remain on the defensive as worries over the deficit increase and as other key currencies move away from ultra-accommodative monetary policies. The dollar index is on shaky ground from a technical perspective as well, and is in danger of seeing another substantial drop based on chart selling.
Although the dollar could be a major driver of gold in the New Year, investors may also pay very close attention to the stock market.
Whether or not 2018 is the year the stock market rally finally comes to an end remains unclear, although the possibility is definitely worth considering. Stocks have been moving higher for a decade now, to the tune of a couple hundred percent. That rally, however, has been built on a house of cards of ultra-low interest rates and quantitative easing. The Fed has already done away with QE (at least for now) and is now in the process of attempting to normalize monetary policy. The central bank has penciled in three rate hikes this year, and seems to be building a case for higher rates in general.
The Fed has spoken of more aggressive policy before, however, and elected to sit tight. If the central bank does take a stronger approach, however, it could have dramatic effects on the stock market. In fact, rising rates could eventually be the final straw for the stock rally. Higher rates would make other asset classes, such as bonds and notes, more competitive and could fuel a decline in corporate profits as borrowing becomes more expensive. The market could finally see a good, old-fashioned correction-or worse-a major sell-off followed by a lengthy bear market.
These risks may keep the Fed walking on eggshells, and the central bank is likely to stay on a cautious and gradual path towards higher rates.
Picking up where 2017 left off, the New Year is also likely to be full of geopolitical issues that could have sweeping effects on global financial markets. The U.S. and Canada have multiple challenges to grapple with, with the North Korean nuclear threat being at the top of the list. Ongoing geopolitical conflicts may also keep a floor under gold prices, and could underpin a significant rally in the metal should tensions escalate further.
The gold market has a number of tailwinds currently, and recent activity would suggest that prices could be headed significantly higher. In fact, 2018 could be the beginning of a protracted bull market in gold that could see a challenge of previous all-time highs or beyond.