(Kitco News) - There are doubts that the Federal Reserve will actually hike U.S. interest rates as much as policymakers think, leaving many analysts bullish on gold for 2018. 

They also cite potential for geopolitical flare-ups, improving physical demand in key buying nations India and China, and investment demand as a hedge against any correction in soaring stocks.  Bears, meanwhile, cite a view that the U.S. economy will remain strong enough that Fed policymakers will in fact hike as much as they've hinted. 

"I think 2018 is going to be a good year for gold, and it should shine bright in the New Year," said Phil Flynn, senior analyst with Price Futures Group. 

Bart Melek, head of commodity strategy with TD Securities Inc., told Kitco News that gold should benefit from a Federal Reserve that will take a "very gentle" approach to tightening monetary policy.  Lower U.S. rates help gold — and vice-versa — by reducing the so-called "opportunity cost," or lost income from holding the non-yielding asset, as well as undercutting the U.S. dollar.  Gold tends to move inversely to the greenback. 

"We don't expect real rates to move up too much," Melek said. " We expect a move in December and perhaps two moves in 2018.  But we think there is a considerable risk that there will only be...one more hike next year." 

By contrast, the so-called dot-plot of individual policymakers shows they envision a hike in December plus three more next year. 

For now, TDS looks for gold to average around $1,313 an ounce next year, compared to an expectation of $1,257 for 2017.  TDS sees gold averaging $1,325 in the fourth quarter of 2018. 

Melek looks for President Donald Trump's nominee for the next Fed leader, Jerome Powell, to largely carry out monetary policy in a manner similar to current Chair Janet Yellen — a "fairly dovish" tightening amid concerns about the lack of inflation in the U.S.

Flynn looks for gold to average somewhere around $1,400 an ounce next year and perhaps hit $1,500.  Macquarie, in a recent report, said it envisions gold hitting $1,400 in 2018 for the first time in five years on "the end of U.S. economic outperformance," meaning a headwind for the U.S. dollar. 

"Yes, the Fed will have to raise rates - growth remains higher than trend - but this is becoming true elsewhere," the bank said. " Crucially we think the dollar is more likely to weaken than strengthen [and] pre-2014 levels are perfectly achievable.  And political risk factors - an unpopular president unable to match up to his domestic promises and facing complex and potentially unsolvable foreign problems - are also be in gold's favor." 

Conversely, as of early November, Robin Bhar, metals analyst with Societe Generale , looks for a pullback to an $1,175 average in 2018 on a view that the Fed will retain some hawkishness and probably hike three more times. 

"We do expect gold to trade lower over the course of 2018, which is predicated on U.S. monetary policy continuing to tighten," Bhar said. " We think that provides a headwind to gold at a time when there are better performance in industrial metals because of synchronized [economic] growth and lack of supplies going forward." 

But while Bhar looked for lower gold prices, he also listed one potential factor that could end up helping the metal.  Should much-talked-about U.S. tax cuts not materialize and boost the economy, this could make the Fed more dovish than otherwise might be the case. 

Stocks, Cryptocurrencies, Geopolitics In Focus

Stocks and cryptocurrencies could end up supportive influences for gold.  There is a certain amount of uneasiness in the stock market even as equities keep hitting record highs, with some fearing a big downward correction is on the horizon.  If so, that could mean safe-haven gold buying. 

"They [stocks] have been pricing in perfection, and I'm not sure that we're going to get a perfect environment for equities to keep going up," Melek said. 

Further, Flynn said, as stocks keep rising, gold becomes "undervalued" in comparison, which eventually can lead to buying of the metal.  He said potential for improvement in overall commodities prices would mean price inflation that helps gold.  Flynn also commented that gold may not only benefit from worries about currencies generally, but the Chicago Mercantile Exchange's plans to launch bitcoin futures could help gold on spillover interest. 

"The gold market is an alternative currency similar to bitcoin," he said, later adding, "If you're looking for an alternative currency, gold is going to benefit." 

Melek looks for improved demand out of India and China as their economies recover.  Goldman Sachs has said demand in emerging-market nations does best when incomes are rising and the populace can afford gold, whereas the metal tends to be bought by people in developed economies more as a safe haven during times of stress. 

Meanwhile, Bhar cited a factor besides U.S. monetary policy that could end up hurting gold — what happens to interest rates in other nations.  The European Central Bank and Bank of England have begun removing monetary accommodation, and Bhar pointed out that Japan's economy is improving. 

Geopolitical factors "come and go," such as the worries about war between the U.S. and North Korea, he said. 

"The Middle East is continuing to simmer, with other terrorist threats around the globe, and that may provide some support from time to time," Bhar said.  Still, he said, the influence of geopolitics is "more erratic in the sense that it ebbs and flows." 

Bhar looks for central banks to remain net buyers of gold, although he said this may offer more of a "cushioning effect" for prices rather than a strong boost.  He suspects that official-sector demand will be less than during most of the past decade. 

By Allen Sykora

For Kitco News

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