2018 was a whipsaw year for global stock markets. Some market indices, such as the American Dow Jones Industrials Average, reached all-time highs, then gave up a large portion of wealth to end the year. Investors digested what the beginnings of a trade war between the U.S. and China might mean for global growth. Europeans, and the world at large, watched the Brexit discussions with heavy interest, wondering if independence is the best political policy. Early in 2018 we saw a world-class display of athletic prowess in PyeongChang. We saw financial markets fiercely debate the divergence in central bank policy between the U.S. and Europe. Through it all, economic growth across the world expanded by approximately 4%. Not bad, not bad at all.
Interestingly, even though global growth came in around 4%, stocks around the globe soured to end 2018. As measured by the ACWI Global Stock Market Index (which is Morgan Stanley’s attempt at creating an index to track stocks across the globe), global stocks dropped 9.1% in 2018. When measured in Euros, the drop in global equities equates to a loss of around $20 trillion in wealth. Not good, not good at all.
On the positive side, gold, the world’s most well-known store of value, gained 3.5% (as measured by the AM Euro measure). If you owned gold throughout 2018, you likely were much happier with your return than owners of stocks.
The return difference between equities and gold to end 2018 presents an intriguing question – Do global equity markets paint a pretty picture for gold in 2019?
The answer is likely to the affirmative. The following figure is the connection between global equities and the price of gold from 2007 to 2018. On a general basis, when stocks are doing well – and thus when the global economy is growing – gold typically goes up. Demand for the precious metal likely plays a role here.
Now, shift to just 2018 (depicted on page 3).
Interestingly, as shown by the black regression line, the relationship flipped in 2018. When stocks around the world dropped, gold gained value.
Why does this suggest a goldilocks year for gold in 2019? Here are two reasons.
First, gold has the demand push price gains. Should the global economy strengthen in 2019, gold will likely follow suit. Demand should increase, and with speculative value mostly gone from the current price, the value of gold should rise.
What if instead of growth strengthening, the global economy weakens in 2019? Would gold drop in value? Probably not. Gold acts as the first resort to turn to when inflation is rising – and inflation would likely be a big factor should global growth weaken in 2019. Gold would therefore likely rise as a hedge against inflation and other imprudent government policies enacted to inflate global economies to grow.
Overall, 2019 is looking like a Goldilocks year for gold. Whether the economy weakens or strengthens, gold could be the beneficiary either way.