The year 2019 could be all about the interplay between market risk and economic growth in 2019 which is likely to drive gold demand. The three key trends that could influence the price of gold in the year 2019 include:

· Financial market instability

· Monetary policy and the US dollar

· Structural economic reforms

All the three factors above could have a key influence on gold prices in the year ahead. In fact, gold prices seesawed in 2018 as investor interest ebbed and flowed despite steady growth in most sectors of demand. Let us look back at 2018 and the specific drivers. Gold faced significant headwinds for most of the year. The dollar strengthened, the Fed continued to hike steadily while other central banks kept policy accommodative, and the US economy was lifted by the Trump administration’s tax cuts. These factors fuelled positive investor sentiment which, in turn, pushed US stock prices higher, at least until the start of October. However, geopolitical and macroeconomic risks continued to increase, emerging market stocks pulled back. Eventually, developed market stocks followed, in a selloff led by US tech companies. This resulted in short-covering in gold with its price ending 2018 at $1280/oz. Let us now turn to the prospects of gold in the coming year.

Gold price and growth potential in the year 2019

Many of the global dynamics seeded over the past two years and the risks of 2018 will carry over. One can also foresee a new set of trends developing that will be the key in determining gold’s demand. In turn, their interplay will be most relevant for gold's short- and long-term price behaviour. Broadly one can expect as follows:

· Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge

· While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signalled a more neutral stance

· Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings.

· Financial market instability could be a key factor in 2019 considering the plethora of diverse factors at play.

Globally, there were net positive flows into gold-backed ETFs in 2018. While North American funds suffered significant outflows in Q2 and Q3, this trend started to shift in Q4 as risks intensified. Broadly, in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk. One can also foresee higher levels of risk and uncertainty on multiple global metrics like the expensive valuations and higher market volatility, political and economic instability in Europe, potential higher inflation from protectionist policies, increased likelihood of a global recession etc.

For the full year 2019, the key drivers of gold prices can be grouped into the following four categories:

· Wealth and economic expansion

· Market risk and uncertainty

· Opportunity cost

· Momentum and positioning.

As a consumer good and long-term savings vehicle, gold demand historically has been positively correlated to economic growth. As a safe-haven, its demand historically has been strongly responsive to periods of heightened risk. In the short and medium term, however, the level of rates or the relative strength of currencies, as well as investor expectations, can either enhance or dampen gold’s performance. Other asset class performance and dynamics will also be the key to the performance of gold. For example, despite the recent market correction, many stock valuations remain elevated, especially in the US, after almost a decade of uninterrupted price appreciation. Despite that bond yields remain stubbornly low Volatility metrics have begun to creep up, with the VIX jumping from an average of 13 in Q3 2018 to an average of 21 in Q4. All these point towards heightened volatility in the financial markets.

Second, while European growth has recovered from the aftermath of the sovereign debt crisis it has failed to reach the level of the US economy, making it more vulnerable to shocks and explaining why Europeans have been adding gold to their portfolios steadily since early 2016. Today, Europe is facing major challenges. The most obvious is Brexit. Not only has it imposed a continuous level of unease among investors, but its timing and implications – both for the UK and for continental Europe – are best left to diviners. What is certain, however, is that clarity will not come any time soon. In addition, continental Europe continues to face internal turmoil. France is grappling with social unrest; Spain is fending off secessionism and fragile political alliance, and Italy's populist government continues to highlight the inherent instability of the monetary union – to name just a few.

Third, more and more governments around the world seem to be embracing protectionist policies as a counter movement after decades of globalization. And while many of these policies can have a temporary positive effect, there are longer term consequences that investors will likely grapple with in the coming years; for example, higher inflation. Protectionist policies are inherently inflationary – either as a result of higher labour and manufacturing costs, or as a result of higher tariffs imposed to promote local producers over foreign ones. They are also expected to have a negative effect on long-term growth. And although so far investors have taken some of the trade war rhetoric as posturing, it is not without risk to restrict the flow of capital, goods and labour.

If you were to combine these trends what you get is an increased risk of recession. For example, in the US there are a few signs that investors are becoming wary. A good percentage of the growth seen in 2018 was a by product of tax cuts. But similar measures may be more difficult to enact with a split congress. There has also been a deterioration of credit markets with spreads widening by more than 70bps since the January 2018 lows, while credit conditions for consumers are tightening. In addition, the US treasury curve is very flat and has also recently turned negative. While an inverted yield curve does not cause recessions, it has generally preceded them – albeit with a long lead. And it indicates that bond investors are concerned about the sustainability of long-term growth.

So is it all rosy for gold in the year 2019? Actually three factors could actually work against the dollar too. Higher US interest rates alone are not enough to deter investors from buying gold, as seen between 2004 and 2007 or 2016 and the early part of 2018. And while higher interest rates combined with a strong dollar can dampen gold’s performance, there are reasons to believe that the upward trend of the US dollar may be losing steam. First, the US dollar DXY Index, which measures the relative direction of the dollar against a basket of key currencies, has already appreciated by almost 10% from its 2008 lows. A similar trend in 2016 was followed by a significant correction. Secondly, the positive effect of higher US rates on the dollar will diminish as the Fed policy stance becomes neutral, especially since the recent US dollar strength was fuelled by the more accommodative monetary policy maintained by other central banks. Thirdly, the Trump administration has often voiced frustration about competitive disadvantage caused by a strong US dollar and not to forget that the emerging market central banks continue to diversify exposure to the US dollar.