So far this year, gold has given the equities market a run for its money. Seeing just how much of a run only takes looking at the difference in performance between the S&P 500 index and gold from the last trading day of last year to April 2 of this year. Here’s what we’ve seen out of the two in this period:
- S&P 500 - The S&P 500 closed the 2017 trading year at 2,673.61 on Dec. 29. By April 2, 2018, the index had fallen to 2,581.88, a loss of 3.4% for the year thus far.
S&P 500 - The S&P 500 closed the 2017 trading year at 2,673.61 on December 29th. By April 2, 2018, the index had fallen to 2,581.88, a loss of 3.4% for the year thus far.
- Gold - On the other hand, while the gains have been relatively small, gold has actually produced gains so far this year. The last trading day for gold in 2017 was Dec. 31, a day on which the precious metal closed at $1,320.25 per ounce. By April 2, the value of the commodity had grown to $1,333.54 per ounce, a gain of about 1%.
It’s clear that gold has outperformed the S&P 500 thus far this year. The real question is whether or not the trend will continue. The answer is probably yes.
Trade tensions play a big part
The first quarter of the year 2018 has been a bit of a geopolitical mess, which is a good thing for the safe haven commodity. Throughout the beginning of the year, there were talks that Trump would spark a trade war through the launch of tariffs on some imported commodities. On March 1, 2018, that’s exactly what happened.
On that Thursday, President Trump and his administration announced that they would soon impose tariffs on imported aluminum and steel. These tariffs would be charged at rates of 10% and 25%, respectively.
However, the move was not met with high fives and cheers. Instead, the announcement of tariffs was met with harsh criticism from around the world as steel is a key commodity that multiple economies are dependent on. With the U.S. being a massive market, these tariffs could threaten the economic stability of multiple regions.
As a result, China recently lashed out, announcing that they would be imposing their own 25% tariffs on U.S. made products ranging from food to technology and everything in between. Of course, the Trump administration promptly responded with news of more tariffs on Chinese products to come.
At the end of the day, geopolitical unrest is rarely a good thing for equities. After all, with geopolitical unrest comes economic unrest, which could directly reflect in the bottom line of publicly traded companies. On the other hand, this trade war has been a great thing for safe haven investments, gold in particular.
Gold is reaching peak supply
While safe haven demand is relatively strong at the moment, general supply could take a hit, and it could happen relatively soon. In 2017, many started to talk about gold reaching peak supply. While studies suggest that peak supply was actually reached back in 1995, it seems as though the year 2017 was when the market really started to notice.
While gold is abundant on earth, peak supply refers to the supply that can be economically and efficiently mined. Essentially, the amount of successful discoveries of new gold have been tapering off since 1995. However, experts are pointing to the fact that the actual production of gold in already discovered and newly discovered gold deposits will start to decline. This is when supply and demand really starts to need some balancing.
Ultimately, gold, like any commodity, is heavily dependent on the law of supply and demand. If gold is indeed reaching peak supply and supplies do indeed start shrinking relatively soon, we could see a boost in prices as the market balances for the lower available supply of the commodity. In a recent statement, Stavros Lambouris, CEO at HYCM Europe, a leading broker in the commodities trading space, had the following to offer:
“Gold seems to be reaching peak supply, which would change the dynamics of the commodity as we know it. This, in combination with other positive signals for the commodity, such as the trade war between the United States and China, the Indian wedding season, and the Chinese New Year, all of which will drive demand, suggests that gold could rise dramatically in the year ahead.”
Jewelry and decorative demand will head up throughout the year
With support coming out of supply and investor demand, jewelry and decorative demand is simply icing on the cake. Pretty soon, we’ll be entering the Indian wedding season. As we enter this season, demand for gold jewelry and decorations generally skyrockets as gold is a key aspect of any wedding in India. As the law of supply and demand suggests, this should provide further support for the price of gold.
Final thoughts
Gold has been an interesting commodity to watch thus far this year as it has outpaced the S&P 500. Considering the fundamental data surrounding gold, it seems as though the gains are likely to continue. However, in the midst of the same geopolitical unrest and economic uncertainty, the S&P 500 may see more hurdles ahead. Therefore, I believe that gold is likely to continue to outpace the S&P throughout the rest of the year and into 2019.
