Macroeconomic Outlook For 2018 And Gold

Luckily or not, 2017 is behind us. It was a positive year for the gold market, as the yellow market gained more than 12 percent. However, investors are forward-looking, so let’s focus on what the coming months will bring. The next year will be shaped mostly by the following broad economic trends:

Global activity is improving.

Labor markets are strengthening further.

Subdued inflation is finally rising (but moderately).

Central banks are slowly reducing their monetary policy stimulus.

Interest rates are rising.

Let’s analyze them now, starting with the accelerating global growth. In 2017, the global real GDP grew by about 3.7 percent. It was higher than in 2016 and significantly above the expectations. Indeed, the world economy is outperforming most predictions for the first time since 2010. And, according to the Goldman Sachs, the world’s real economic activity may rise by even 4 percent next year. Importantly, the global growth is broad-based across countries. Gold is a safe-haven asset, which shines the brightest during periods of economic malaise, such as Great Recession. Hence, the solid economic growth likely to occur next year will be a serious headwind for the yellow metal.

With relatively strong economic momentum, the labor markets should strengthen further. In several developed countries, including the U.S., the unemployment rate has already fallen to the pre-crisis level (see the chart below). The advanced economies are thus near full employment, with quickly closing output gaps.

Chart 1: The unemployment rate (red line, right axis) and the inflation rate (CPI, green axis, left axis) in the U.S. over the last ten years.

Hence, the flourishing economy and the tightening labor market should finally raise inflation. Actually, inflation is significantly higher than two years ago, as one can see in the chart above.

Gold is perceived to be a hedge against inflation, but a moderate increase in the CPI or the PCEPI should not boost the price of the yellow metal. Gold shines brightly during periods of high and accelerating inflation, so unless inflation gets out of control, significantly exceeding the Fed’s target, it should not rally madly. However, we cannot exclude inflation rearing its ugly head again. Actually, this is one of the biggest upside risks for the gold market in the medium-term.