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Outlook 2018, Part II: Gold, Silver, Oil, USD, Euro, Central Banks

By Investing.com Market OverviewDec 28, 2017 03:07AM ET
www.investing.com/analysis/outlook-2018-part-ii-200276001
Outlook 2018, Part II: Gold, Silver, Oil, USD, Euro, Central Banks
By Investing.com   |  Dec 28, 2017 03:07AM ET
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This is part two of our annual outlook post for the coming year. In part one, published earlier this week we covered the 2017 outperformers, Stocks and Cryptocurrencies.

Risk rose in 2017—via North Korea’s ongoing saber rattling in the form of ballistic missile tests; the re-emergence of global populism which this past year included Donald Trump’s first year as president of the US; the UK’s continuing, muddled Brexit negotiations; the ascent of Catalan separatism and recent Euroskeptic election victories such as Sebastian Kurz’s People’s Party in Austria, not to mention the weak outlook for a variety of nationalist-leaning parties in South and Central America—but global markets remained exuberant, with US markets at the forefront, though shares in South Korea (up 20.2% YTD), Brazil(+26.3% YTD) and Hong Kong (+34.5%) outpaced US gains (19.8% for the S&P). The best performing index this year however was Vietnam's Hanoi 30, up a whopping 53% on the year so far.

At the beginning of 2017 many wondered if the Dow Jones Industrial Average, which started the year at 19872.86, would hit 20K. As of the Friday before Christmas it closed at 24,774.30—25.3% higher on the year and 23.8% above that 20K ‘fantasy.’ Oh, and during the course of 2017 so far it’s hit over 70 new record highs, the most record closes for a year ever, surpassing the previous record of 69, made in 1995.

The S&P 500 wasn’t exactly a laggard either: it began 2017 at 2251.57 and closed on Wednesday at 2682.62, up 19.8%. The NASDAQ Composite also outperformed expectations, gaining 28.9% over the course of the year so far, propelled higher by tech sector shares which are currently up 34% on the year (using iShares US Technology (NYSE:IYW) as our benchmark).

Oil appears to finally have recovered from its swoon after the 2016 slump, but the dollar continues to look unsteady. Volatility remains practically non-existent, but cryptocurrencies have been on an eye-popping tear, barreling past other assets this year in terms of percentage gains: Bitcoin hurtled higher by 1430% for 2017, having started the year at $999; Ethereum rocketed from $8.17 to $735.61, up 8900%, and Ripple rallied from $0.00652 to $1.20, or 18,300%.

On a quieter note, the Fed delivered on their three-rate-hike promise this year, with another three forecast for 2018. Though the European Central Bank (ECB) has confirmed that it is cutting monthly asset purchases they remain cautious about raising rates. As for the Bank of England (BoE), along with general monetary policy decisions, they also must contend with what remains a great unknown—how will Brexit negotiations play out for the UK?

Many claim they’re happy to see 2017 in the rearview mirror, but from a markets perspective it was indeed a very good year. Will 2018 be as good (or perhaps better) for investors? We asked 12 of our most popular contributors, as well as some Investing.com analysts, how they see markets performing as 2018 begins.

Steven Knight: Brent Could Pop, Then Drop Below $60


2018 is likely to be the year that the impact of monetary policy will probably rear its ugly head. In particular, labor markets throughout most of the major western countries are tightening and inflationary pressures are on the rise. Subsequently, we are likely to see multiple central banks tightening their monetary policy which could have an adverse effect on equities. Presently, it’s difficult to see much value in the S&P and it’s likely to be the asset class hit the hardest if the Fed does indeed stick to their “dot plot”.

In contrast, FX markets have been the flattest I have seen in my career and the lack of volatility has been tough on traders and funds alike. However, with inflation and central banks returning to the fray we are likely to see some very big moves indeed which could provide some excellent trading opportunities. In particular, watch for the USD to sharply gain against the yen in the year ahead.

Finally, crude oil is likely to provide plenty of positions in the coming year with the war between OPEC and US shale oil producers ongoing. However, despite their presently being plenty of buoyancy for the commodity, the medium-long term view falls on the short side as shale oil production continues to ramp up in response to higher prices. Subsequently, 2018 is likely to be the year where we see Brent prices pop higher before rotating and slowly sliding lower back below the $60.00 handle.

Tom Luongo: EU Capital Flight Will Drives Euro Lower; Gold Breaks Out

In 2018 the dominant issue will be the political unraveling of the European Union. With the fall of German Chancellor Angela Merkel atop the EU power structure, the political cracks we saw in 2017 – Brexit negotiations, Catalonia secession, Visigrad immigration opposition – will widen. I’m looking ahead to the Italian elections in May as a potential turning point for a new European banking crisis emerging. And given all of this, in my estimation, the euro is easily 20%, if not 30%, over-valued.

The reversal of the euro’s current counter-trend rally within a primary bear market will accelerate capital flight from Europe. We’re seeing the beginnings of this now with the Dow making new highs but the German DAX struggling. Against this backdrop Gold will finally break out of its six-year doldrums. Cryptocurrencies will continue their meteoric rise as well.

Confidence will be the word of the day. If confidence in the ECB shifts there will be a major move out of sovereign debt into tangible, movable assets like Gold, Bitcoin and US stocks as these will be the most liquid. Right now, there is a great pair trade between gold and either Bitcoin or the Dow. Gold has been weak in December in recent years and rallies hard in Q1. Any further selling in gold should be met with rotation out of wins in cryptos and stocks and into gold. As the gold bull market emerges this simple rebalancing should make investors significant alpha in 2018 and beyond.

Jason Sen: Long Gold, Silver To Hedge Against Stock Correction

Despite almost 10 years of a very strong bull market for US stocks there is no sign of this run ending. Much as I believe the market is overvalued I would never dream of betting against the trend and will only watch for patterns through 2018 that could signal the end of the bull run before I would even think about shorting.

My best suggestion for 2018 is a long position in gold and silver, not only because this is a good hedge against a sharp correction in stock markets. In the gold weekly chart below you can see however the price has traded mostly sideways over the past 2 years, once we made a low for the correction at 1045 in late 2015. This year we have been unable to beat the recovery high set 18 months ago in mid 2016 at 1375.

Gold Weekly 2011-2017
Gold Weekly 2011-2017

The weekly moving averages confirm the sideways trend, but I am encouraged that the price is holding above the 200 (red) and 100 (blue) week moving averages as we near the end of the year. More importantly, we are holding above the 5 year downward sloping trend line (which at this stage is at 1215, just below the 200 day moving average at 1232.

Bulls need to see the price close above 1270 at the end of this year to start next year on a more positive tone. A move back above 1280/85 in January would be a good start to 2018. If we can then beat the October/November highs of 1297/1306 we should be on the way to the 2017 high at 1357 before the most important resistance of the year at 1374/79. This is the 2016 high, which was held by the longer term 38.2% Fibonacci resistance. A break above the 2014 high at 1387/88 should be seen as a strong longer term buy signal.

The silver monthly chart below shows the price stabilizing over the past 2 years as we hover above the red 200 month moving average support around the $16 area.

Silver Monthly 2003-2017
Silver Monthly 2003-2017

You can also see the important 13 year trend line dating back to early 2004, which held perfectly when tested more recently at the end of 2015 and in mid 2017. I believe we are building a base and will eventually climb back towards the 2017 high at 20.64 then 2016 high at 21.10. Note how the blue 100 month moving average worked perfectly as resistance when tested in 2016. Obviously a break above this average in 2018 would be an additional buy signal and will nicely clear the 500 week moving average, (now around $21) to encourage bulls.

The silver weekly chart below gives further cause for optimism as long as we continue to hold the 5 year downward sloping trend line support, as we have done so in recent weeks. A push higher through the October/November high at 17.37/17.46 in 2018 will also clear the 100 and 200 week moving averages for further bullish confirmation.


Silver Weekly 2012-2017
Silver Weekly 2012-2017

Ellen R. Wald, Ph.D.: Oil Production Cuts To Continue; More US Shale Divergence

OPEC will continue its oil production cut agreement with its non-OPEC partners at least through June and likely through the year. However, we should expect that some countries will continue to cheat and overproduce, as usual. Other countries, however, will struggle to produce at their quota levels. Because some countries will under-produce, Saudi Arabia may produce more than it has recently, but it will still stay within its quota. Russian oil companies will overproduce as well, but the country will likely try to present an image of compliance with the agreement.

Global demand is expected to grow—a sound assumption barring a serious drop in the global economy. The industry obviously wants oil prices to rise, but Saudi Arabia and some of the other Gulf countries do not want the prices to rise much above $60 (and not above $70) because that could hurt the global economy and global demand.

In the US shale industry, we may see more market divergence. Some companies will struggle to raise needed capital and may be forced to sell assets or merge. The better capitalized shale enterprises with better shale assets will benefit as long as oil prices do not drop markedly. The big question for the US shale industry in 2018 will be whether higher oil prices increase investors’ appetites for shale opportunities or whether investors will demand returns, not just growth.

In the electric vehicle (EV) sector, expect more skepticism of the viability of current EV business plans. Expect rumors of much lower adoption projections than those we have seen over the last few years. Unless we see a breakthrough in technology, more analysts may lose patience and begin to doubt the ability for engineers to develop truly revolutionary batteries. It is likely that more environmentalists will express concern about the environmental impact of producing and charging powerful lithium-ion batteries.

Look to Tesla (NASDAQ:TSLA), Volvo (OTC:VLVLY), and other companies with significant EV plans to see where this phenomenon is going. If one of these companies tempers its projections for EVs, it could mean the idea is not ready for the mainstream consumer.

Matthew Weller: Will 2018 Be A Mirror Image Of 2017 For USD?

No two ways about it: 2017 was a brutal year for the US dollar. The world's reserve currency fell against all of its major rivals on the year, losing a staggering 9% against the British pound and nearly 13% against the euro through the first eleven months of the year. Incredibly, this move occurred despite the Federal Reserve raising interest rates three times this year.

So what drove the dollar lower throughout the year? The same thing that always moves markets: an imbalance between buyers and sellers. As the calendar flipped to 2017, hopes were running high that "Businessman President" Donald Trump, along with the Republican-controlled Congress, would unlock the growth potential of the US economy through a combination of cutting taxes and reducing regulation.

This view was reflected in the CFTC's Commitment of Trader (COT) data, which showed large speculative futures traders were holding net long positions in the US Dollar Index to the tune of over 54,000 contracts, essentially the highest net long position in over a year. With traders lopsidedly positioned for continued gains in the greenback and President Trump at times struggling to enact his legislative agenda, it's no surprise that the optimism bubble deflated and the US dollar fell consistently throughout the year.

Now we're presented with the mirror image scenario from the start of last year. In other words, the pendulum of market sentiment has shifted from extreme bullishness with high expectations to extreme bearishness with low expectations, setting the dollar up for a far better year in 2018 than 2017.

Jesse Cohen, Investing.com: Shale Derails OPEC, Powell Tested, Bitcoin Pops Then Drops

Rising US shale oil output will derail OPEC’s ongoing efforts to rid the market of excess supplies and prevent prices from rising much further next year, with crude futures forecast to trade in the $55-to-$65 range.

Domestic US oil production has rebounded by almost 15% since the most recent low in mid-2016 to around 9.7 million barrels per day at current levels, the highest since the early 1970s and close to the output of top producers Russia and Saudi Arabia. Increasing US drilling activity for new production means output is expected to grow further, as technological innovations at US shale oil companies make it cheaper for them to produce.

On the Fed front, Jerome Powell, who will take over as chair of the US central bank when Janet Yellen's term ends in February. Fed policy will be tested early as economic data stateside starts surprising to the downside and growth prospects begin to dim. That could lead Powell to reverse the current plan to wind down the Fed's $4.5 trillion balance sheet in order to support the economy.

Finally, after plunging mightily in December, Bitcoin will continue its jaw-dropping rally into the early part of 2018. Perhaps this is fantasy, but it wouldn't surprise if prices peak at around the $60,000-level, before Russia and China partner up to sideline the cryptocurrency. That move would spark an epic crash, taking Bitcoin prices back down to the $1,000-$2,000 range.

Jason Martin, Investing.com: Major Central Banks To Stick To Current Policy

I see central banks continuing to stick to the path they’re currently on in 2018:

Federal Reserve: With the process for the removal of accommodation well underway, the changing of the guard at the helm of the Federal Reserve—Janet Yellen passing the baton to
Jerome Powell in February—may mean little for US monetary policy in 2018. In the latest economic projections released in December, the Fed itself predicted that there would be three rate hikes next year and although President Donald Trump still has spaces to fill at the US central bank, it’s looking less and less likely that there will be undue pressure from the White House.

The changes to the Fed’s dovish outlook are still far from leaning into an even remotely “hawkish” camp. 2018 looks to be shaping up a lot like the year gone by: the Fed trying to “over-communicate” to the markets what it will do far in advance.

European Central Bank: The ECB appears to be letting the Fed take the lead and then cautiously following. In its December meeting, the euro zone monetary authority confirmed its previously announced plans to cut monthly asset purchases in half to €30 billion ($35.5 billion) beginning in January and extend those purchases to “the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”.

The ECB’s stance follows in the Fed’s footsteps in terms of being gradually “less dovish”. ECB chief Mario Draghi has insisted that interest rates will not move “for an extended period of time, and well past the horizon of our net asset purchases”. Markets, in fact, are not pricing in a move until at least 2019. Not unlike its US counterpart, the ECB has been fighting remarkably muted signs of inflation despite bustling strong growth led by Germany. That very growth is adding to speculation that hawkish members of the Governing Council will begin to push harder for policy tightening in 2018.

Bank of England: The Bank of England is a bit of an outlier in this trio of central banks. While the BoE faces a similar problem of low wage inflation, it is the only one of the three that has seen headline inflation soar past and remain far beyond its target, placing a serious squeeze on households’ cost of living. Although the BoE eventually undid the rate cut implemented after the UK voted to leave the European Union, its policymakers remain reluctant to make further moves in tightening monetary policy due precisely to the uncertainty surrounding the Brexit negotiations.

The bank’s Monetary Policy Committee insisted in its December meeting that inflation had peaked at its most recent reading of 3.1%. At the moment, markets do not expect the BoE to raise rates again until towards the end of 2018, when it will add another 25 basis points.

Pinchas Cohen, Investing.com: USD Stays Under Pressure; AUD Soars; Oil To $75?


The dollar is being pressured by continued low inflation, leading investors to lose faith in the Fed’s outlook of a sustained recovery, evident via flat Treasury yields. Mohamed El-Erian’s argument that a string of record breaking equity advances suggests investors do in fact have a bullish outlook for the economy is humbly challenged by our argument that yields have been falling even when equities where rising. Indeed, since the mid-2016 Brexit vote equity traders narrowly focused on immediate company (and their own) share profits irrespective of the sustainability of economic growth.

Confirmation of a bearish dollar is the rounding bottom in gold since June 2013. A penetration of the $1,375 peak posted on July 2016 would enter the precious metal into a long-term trend reversal, eyeing the $1,600 level. Gold maintains a general inverse relationship with the greenback, as it is priced in dollars and is a safe haven asset.

  • DXY Range: 92.50 and 95.00

AUDUSD Monthly
AUDUSD Monthly

  • Most Bullish Currency: AUD; Could hit 0.8500 – 0.9000

Australia’s economy will continue growing at a robust pace, according to the OECD, with inflation and wages both picking up gradually. The central bank is projected to tighten in the second half of next
year. As well, The London-based Centre for Economics and Business Research is forecasting Australia will move up two places on its world economic league table by 2026 from its current ranking of 13, which would mean it had boosted its economic growth.

Technically, the commodity currency has been in a macro uptrend versus the dollar since 20001. It bottomed in January 2016 and has entered a rising channel since then. The currency has both fundamentals and technicals on its side.

  • Euro will range 1.1500 – 1.2500, yen 108.00 – 114.00

The euro and yen are subject to near-zero interest rates with no end in sight. Both are also subject to macro falling trends, but while the yen has been ranging this year, the euro broke out of a range since 2015.

  • GBP will range 1.2000 – 1.3000

Arguably, the most unpredictable currency is sterling, considering so much is riding on Brexit negotiations, of which it’s anybody’s guess how they’ll develop. This uncertainty is visually represented
by the price which is wedged between its long-term downtrend line since mid-2014 and its midterm uptrend line since October 2016. In the final analysis, we would count on the long-term downtrend line, as well as a MACD primed to decline and a negative divergence between a sideways RSI with a potential of a H&S momentum-top to the rising price.

  • WTI will range $65 - $75

The Libyan pipeline explosion pushed oil prices higher, as it interrupts the unlimited production of one of just two OPEC countries exempt from production caps. Improving economic conditions suggest rising demand.

As well, Saudi Aramco’s IPO signals that Saudi Arabia will do whatever it takes to keep prices up, at least until the IPO late next year. After that however, Saudi Arabia will have to deal with its fiscal deficit. More importantly, rising prices would attract US shale production, driving prices back down. Meanwhile, the price completed a symmetrical triangle, a continuation pattern, with a target price of $62.00.

If you haven't already, now read Part I.

Outlook 2018, Part II: Gold, Silver, Oil, USD, Euro, Central Banks
 
Outlook 2018, Part II: Gold, Silver, Oil, USD, Euro, Central Banks

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Solomon Lalani
Solomon Dec 29, 2017 7:22PM ET
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You don't see this bear flag on monthly AUDUSD chart?  Unlike your forecast of AUDUSD being the most bullish pair for 2018, red arrow is direction for the flag to break.  See you in 2020 end at AUDUSD below 0.55
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jobs steve
jobs steve Dec 28, 2017 8:46PM ET
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Great article .Who is the author of this article?
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Dwain Hobbs
Dwain Hobbs Dec 28, 2017 4:29AM ET
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You are missing the big picture as to why the dollar is falling vs euro despite five rate rises now,, every year had its unexpected surprises, next year will likely be the unexpected ( or expected ) dollar demise. Euro will benefit only temporarily though,, u will be most likely correct about gold and silver..
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chris brooks
chris brooks Dec 28, 2017 4:29AM ET
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the markets are rising in all feilds but looking insight from everywhere thanks
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Benjamin McIntire
Benjamin McIntire Dec 28, 2017 3:50AM ET
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Euro will drop, yen will drop, and yet gold will rise? I want what you’re on.
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Tanjeet Ahmed
Tanjeet Ahmed Dec 28, 2017 3:50AM ET
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ok, but my profit.......?
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chris brooks
chris brooks Dec 28, 2017 3:50AM ET
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learning the game quick as I can. just looking for input. thanks for the insight
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