Macroeconomic Outlook Will Remain Unpleasant

The current economic expansion is surprisingly durable, as it has already lasted more than 100 months. It worries many investors who are afraid of the upcoming recessions. Surely, there are many reasons to worry, and the recession will eventually come. But we are not at this point yet. The current expansion is unusually long, but it is exceptionally sluggish. This year we expect that the global economic growth will continue. Actually, it may even accelerate and become more synchronized among countries. Moreover, with relatively strong business momentum, the labor markets in advanced economies should strengthen further. And although inflation is likely to rise, it will remain low. Hence, the macroeconomic outlook will remain unpleasant for the gold market, as the yellow metal prefers periods of economic turmoil or stagnation.

Fed Will Be Gold’s Enemy

The Fed will continue its gradual tightening. In 2017, the U.S. central bank lifted interest rates three times. We expect similar number of hikes this year. The unwind of the Fed’s enormous balance sheet would withdraw some liquidity from the market, exerting an additional tightening effect for the financial conditions. Moreover, Jerome Powell will replace Janet Yellen as the Fed’s Chair. And we will also see a few other significant personal changes at the U.S. central bank. We predict, thus, that the FOMC will be more hawkish in 2018 than in 2017. The Committee will include more hawks (due to the normal rotation among the regional Fed Presidents, Trump’s nomination to the Board of Governors), but also all the members could vote in a more hawkish way, given the strong economic momentum. A lot will depend on inflationary dynamics, but we believe that a modest hawkish shift is likely this year. Gold reacts more to the real interest rates, not to the federal funds rate, but the Fed’s hawkish rhetoric should be a headwind for the yellow metal.