Gold has a bright outlook

Gold’s outlook in 2019 is positive, with the price breaking up through a variety of resistance levels since the brief dip below $US1200 ($1700) in November.

Gold spent the middle part of last year on the defensive as markets expected – or feared – a rapid pace of tightening by the Federal Reserve in the US, leading to a sharp rally in the $US.

This year looks very different, as chairman Jerome Powell’s policy statements implied that the Fed believes that the tightening cycle may be at an end. The January communique contained no references to a coming rate increase at all, merely that the committee would be patient in its judgement.

Meanwhile, the US economy continues to show signs of continuing strength, so there is some confusion about Fed policy, with some thinking that the US central bank is willing to risk a bit more inflation in the economy. Either scenario favours gold.

Elsewhere, fears of slowing growth, with notably weak data from China, supports gold relative to global equities. Brexit and Venezuela also provide a “risk” environment that is supportive for gold.

The improving outlook for gold is reflected in investor flows, with almost 71 tons being bought by exchange traded fund investors in January, in addition to the 72 ton increase in December. Likewise, open interest in gold futures in New York increased by about 270 tons between mid-December and January 18.

Which levels are important for gold now? It needs to break above the vital $US1375 level, a price point where gold has failed at, or just below, three times since 2016. Major support comes in at $US1263.

Given the uncertainties around the timing of the US interest rate cycle, gold could face volatility as perceptions change. However, I expect gold to continue within an upward trend channel through 2019.

For Australian investors, gold in Australian dollars is a good hedge against $A weakness if China slows further and as diminishing housing wealth affects consumption locally.