Gold made a strong start in 2018, gaining value in the first quarter of the year before a six-month slump, finally returning to growth in the run-up to Christmas.
That in itself may have surprised some investors, following December price drops in the previous five years – but is it significant for the future long-term value of gold?
With several patterns and influences converging, there are good reasons to expect gold values to break out in 2019-20 – here are just some of the reasons why.
The benchmark high
Like most commodities, stocks and shares, the price of gold typically fluctuates between highs and lows that follow a long-term trend.
In this sense, since the major price correction leading up to the summer of 2013, gold has tracked an upper benchmark of around $1,350 and a low that rarely falls far below $1,200.
During that time there has been a reversal of fortune, as the steady declines until 2016 have turned into a steady climb instead.
While the high point has remained around $1,350 ever since, the low has trended upwards, with fewer and fewer falls into sub-$1,200 territory.
The bouncing ball
This narrowing of lows towards the long-term high water mark of $1,350 gives the historic gold price chart an inverted bouncing ball pattern, with shallower and shallower dips.
Most recently in spring 2019, prices fell to around $1,270 before quickly and strongly rallying in early June to return back towards the long-term high.
With the slumps becoming shallower and more short-lived, the question now is whether gold is primed to close the remaining gap and break out above $1,350, or whether future drops in value are likely.
What about seasonal effects?
Gold’s value remains high over the long term, and unless you bought in during the surge of 2011-13, you’re still likely to be turning a profit as of mid-2019.
Short-term seasonality is harder to spot. Value tends to increase in the first half of the year, reaching a high during the summer months, but this is not always the case.
Similarly, the pre-Christmas slump did not really emerge in 2018 – perhaps because the precious metal was already undervalued in the second half of the year – and this complicates the seasonal pattern further.
But is there another factor influencing the price of gold that could explain why the seasonal effects are not always completely reliable?
Gold prices vs. Fed rate hikes
An even more accurate predictor of gold values – and especially drops in gold values – is the timing of rate hikes by the Federal Open Market Committee, the US equivalent of the UK’s Monetary Policy Committee, and better known to most people as the Fed.
Interestingly enough, Fed rate hikes in recent years included quarter-point increases in December 2015, 2016, 2017 and 2018, aligning with the slumps in gold’s value in 2015-17.
Other recent Fed rate hikes include March and June of 2017, and March, June and September of 2018.
Gold’s value hit lows in March, May and July of 2017, along with the deep trough during the second half of 2018 – approximately around the times of Fed rate increases.
Again it’s not a perfect pattern match, but it adds to the picture and raises the question of whether, following several years of more frequent rate hikes, will the Fed choose to take action again in 2019?
Is a Fed rate hike likely in 2019-20?
All indications are that there will be no Fed rate hike in 2019, which is good news for the short-term value of gold over the remainder of the year.
In March, the Fed reported slower economic growth in the US and significantly, revised its predictions for the year from two rate hikes to no rate hikes at all.
Signs suggest that there will be one rate increase in 2020, although this is not guaranteed – and Fed Chairman Jerome Powell told the press: “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”
If so, that could all but remove one of the most direct negative influences on gold prices from the coming 18 months.
A new benchmark?
Investors will be hoping to see the bouncing ball pattern become a positive one, with $1,350 becoming the new long-term median and a pattern of increasing highs until a new, higher upper benchmark is found and $1,350 becomes the new lower threshold.
All of the traditional negative influences – the seasonal effects and the Fed decisions – seem to be falling into line to allow for this to happen.
Finally, it’s worth remembering that dollar exchange rates also affect the value of gold for investors from outside of the US, and in 2018 that meant those who held gold over the full year actually turned a modest profit.
Currency fluctuations are a separate issue and volatility between the dollar and the pound is likely to be difficult to predict for UK investors in 2019-20, increasing risk but also potentially increasing returns by magnifying any gains in the dollar value of gold.
For the long term though, the signs are all there to indicate that gold is ready to move above $1,350 at long last.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.