Gold starts 2018 well bid, ignoring sky-high stock markets and cryptos

Gold has started on solid footing in 2018, even in the face of soaring equity markets and interest in cryptocurrency Bitcoin; bullion has been impressing many, and lining the pockets of many others.

Those playing the short side of the market may not be so impressed.

Looking at global stock markets, what goes up must come down, at least that's the view of many of the bullish gold calls seen since the start of the year.

"With interest rates poised to push higher in 2018 and stock valuations looking increasingly stretched, equity markets are becoming susceptible to a significant downside correction," argued ANZ in a recent research note.

"For the moment, this looks unlikely as US companies receive a boost from tax reform measures. However, any sell-off later this year should see investors quickly rotate back into gold as a safehaven," the Australian bank added.

For now the biggest support for gold is in the form of a weaker dollar.

"The dollar's demise is the clearest driver for the precious rally and for further upside. The dollar index is down 3% year to date, and our FX team see more pain ahead," ING said.

The building in length of buy-side interest has more room to the upside, in the Dutch bank's view.

"Longs represent 39% of open interest compared to the highs of 48% seen in 2017. Open interest had a slight dip January 22 suggesting some profit taking, but outside of futures there has also been a net 852,000 oz of inflows into Gold Exchange Traded Funds [at time of writing]," ING added.

Clearly bets are on for gold to continue higher, for the time-being at least.

The London Bullion Market Association gold price, administered by IBA, settled tarted the year at $1,312.80/oz. The price closed 2017 at $1,296.50/oz. At the time of writing dollar gold was spot bid around $1,360/oz.

CRYPTOS, BLOCKCHAIN AND GOLD

Speaking to S&P Global Platts at the back-end of 2017, Zhiyan (David) Xu, portfolio manager and MD of indexing and quantitative Dept at HuaAn Funds said of the rise of cryptos: "We think it has taken away some wind from gold investing, but not much. Cryptocurrencies trading is not available within China. People still view gold as safehaven and a good place to store wealth in China. We think gold ETFs have a bright future."

In a recent research paper global lobby group the World Gold Council said of the threat of cryptos: "Bitcoin's parabolic price rise was the big story of 2017 -- putting the spotlight on the cryptocurrency market. While gold's performance was a solid 13%, it was a fraction of the 13-fold increase of Bitcoin by the end of the year."

WGC added that some commentators went as far as to claim cryptocurrencies could replace gold.

"Cryptocurrencies may become an established part of the financial system. But, in our view, gold is very different from cryptocurrencies," the paper read.

These reasons included: less volatility, Bitcoing dropped from around $20,000 to $10,000 in the blink of an eye at the start of January, also gold is far more liquid and established marketplace.

"These characteristics underpin gold’s role as a mainstream financial asset that will likely continue to resonate in today’s digital world," the WGC concluded.

Still, the London Bullion Market Association, said recently that it is looking at the benefits of blockchain, the algorythim that powers cryptos, and its benefits for the global gold supply chain.

"The LBMA will shortly be launching a Request for Proposal (RfP) to enable the international market to further strengthen gold supply chain integrity. This initiative builds on the LBMA's Responsible Sourcing programme and focuses on how technology can ensure supply chain provenance," it told members.

EYES ON BRINGING MORE MINERS TO TABLE: LBMA

Separately, S&P Global Platts reported January 15 that, in a move that is being seen as positive by the wider precious metals market, the LBMA is proactively looking to increase its membership to include miners and investors, as well as its traditional base of banks and refiners.

Over the years some have called for the LBMA to initiate a miners category, something that it has previously talked down and denied would happen.

However, an LBMA spokesperson said that it is now no secret that the organization is looking to widen its net and bring on board miners and investors.

The LBMA's CEO Ruth Crowell is attending this year's Mining Indaba in Cape Town, a major mining conference in the annual calendar.

Back with price action, "strongly performing equities and other risk assets tends to be negative for gold, however increasingly evidence of hedging of riskier equity and corporate bond trades in gold helps explain why bullion is continuing to hold its own in this ostensibly challenging environment," suggested Mitsubishi strategist, Jon Butler.

The geopolitical climate and potential equity market problems will likely continue to support the dollar gold price throughout 2018, according to the Thomson Reuters GFMS Gold Survey Outlook, published January 25.

ALL ABOUT EQUITIES

"We argued three months ago that there is growing risk in equities and while strength has persisted we continue to believe that the markets need to brace themselves for a sharp correction once the feeding frenzy abates," GFMS said.

However, it also suggested that if that were the case gold could be hit as investors sought liquidity to cover losing positions.

GFMS expected gold prices to average $1,360/oz in 2018, and hit a peak of over $1,500/oz later in the year.

GFMS' forecast discounted three US Federal Reserve interest rate rises, although a potential overheating from the effect of the recent tax.

Nell Agate, Citi strategist, said of gold support: "The golden trinity of the US, India and China dominate precious metals markets for different reasons. But increasingly, geopolitical events in a risky world have supported the tactical use of gold for short-term gain as well as the strategic use of gold as a wildcard hedge."

Gold is a particularly good hedge during financial crises and periods of asset market unwinds.

Looking at physical markets, Indian demand was set to remain at levels similar to 2017, "while Chinese investment demand will likely pick up if we see gold's price momentum being renewed going forward", GFMS said.

Platts Gold Premium India assessment came in at minus $2/oz January 25, up from minus $10/oz January 18.

This was attributed to local refiner PAMP being out of the market for care and maintenance, thus creating a shortage of physical gold.

2018 may be all about all that glitters really is gold.