Gold Fund: Will it shine in 2018?

Gold continued its lacklustre performance in 2017. Seventeen gold funds on an average generated 2.47 per cent return in the last one year. The only respite for an investor was that gold prices closed above what was prevailing at the beginning of the year. It closed the year above US$ 1,300 per ounce against US$ 1,150 per ounce at the start of the year. There were expectations that it will perform much better in the year 2017 as it had underperformed most of the asset classes in the last three years and five-year time frame. The year 2018 has also started with similar hopes. Now, let us understand the factors that play important role in determining the returns from gold.

The prices of the gold are primarily driven by events in the United States. One of the prime factors that impact the gold prices is movement in the US Dollar. Gold and dollar usually move in the opposite directions. A stronger US$ makes assets pegged to the currency expensive to buyers using a currency other than US dollars.  In 2017, US Federal Reserve got into rate hike cycle. This move would have made the US dollar stronger and hence the fall in the gold prices, however, prices largely remained stable. The year 2018 is also likely to remain same for gold prices and US dollar. They will remain stable as it is unlikely that the greenback is going to move up higher.

Nevertheless, if Trump’s tax reform comes through, it will boost the dollar and that will negatively impact the gold prices. Other factors that can positively impact gold price is geopolitical tension, which till now has taken a backseat.

Besides the fundamentals, the technical analysis shows that there is very little probability that gold prices are going to rise in year 2018. On the contrary, if it is not able to sustain US$ 1,350 per ounce, we may see fall in the gold prices. Therefore, if you are looking at gold funds, it should be purely based on asset allocation strategy rather than higher return expectation.