I can’t blame you for overlooking gold on your wealth building journey through the stock market. Broadly speaking, stocks have been on the upswing for nearly a decade and rose dramatically in 2017. In the middle of this risk-on rally, many investors likely ignored gold. There is not much excitement in sustainable gold mining, the smelting process, shipping doré bars to a central refining facility, and turning the precious metal into a valuable consumable product used industrially, and by consumers. Yet, the market melt-down of early 2018 cast the spotlight on potential financial bubbles and a few sharp pins. I’ve long been of the opinion that the combination of robo-advisors, ETFs, and passive investing have created pricing inefficiency, particularly, for large-cap US stocks. With economic uncertainty building momentum, now should be the time to invest in gold to protect your wealth from future turbulence. Below are three reasons why 2018 is shaping up to be a breakout year for gold and why you should consider owning the yellow metal.

Rising Inflation

If you have studied the history of markets, you are well aware that the price of gold rises when the cost of living increases; and inflation is making a major comeback. Just last month, the Bank of Canada announced that the nation’s annual inflation rate has reached 2.2%, a touch over its 2% “sweet-spot” target. In the United States, the Federal Reserve chair expects inflation rates to pick-up. There is even talk of inflation in the women’s movement, where claims are being made that ladies are suffering from runaway inflation while shopping for shoes! Dramatic increases in prices are not a male construct; rather, it is the consequence of a monetary policy which has seen central banks inject 34 Trillion Dollars of liquidity into markets worldwide over a period of just 8 years. In physics, there is a lag between the application of force and the reaction. In such cases of input latency, one can come to expect a slow, but continuous escalation of prices for the foreseeable future. As rising costs put pressure on producers and consumers, such a scenario creates an appetizing mix in favour of gold ownership.

US Dollar Worries

Higher bond yields and general optimism over the US Economy did not help the greenback in 2017, as the US Dollar index declined nearly 10% last year. Commodity prices and the US dollar share an inverse relationship. When the value of the dollar was falling against commodity prices as it did between 1998-2008, the price of gold nearly tripled. Conversely, when the US dollar began to rise in 2011 relative to the price of gold, the yellow metal began its decline from a hight of $1900USD. The US Dollar index (USDX) measures the value of the dollar in the international market. The value (rate) is generally determined by comparing it with a basket of currencies of other countries. This makes the USDX a pretty good tool for measuring the U.S. dollar’s global strength. In the past couple of years, the greenback is coming off a high valuation and generally fluctuates from expensive to cheap. Looking at this chart, one can come to the conclusion that in its current cycle the USDX is in a longer-term downtrend. This currency dynamic creates a favourable environment for gold.

Supply/Demand Dynamics

Putting rising inflation and downward pressure on the US dollar aside, there are structural supply and demand dynamics to provide gold with a lift. Jewelry demand saw its first increase in five years, while gold’s increased use in the electronics and automotive sectors sparked the first year of growth in technology demand since 2010. China and India, where gold bars are the traditional form of saving, gold demand has been steadfast, seeing gold imports increase 50% and 67% year-over-year respectively.

Throughout 2017, gold mining was incredibly feeble. Total supply fell 4%, from 4,590.9t in 2016 to 4,398.4t in 2017. While new mine starts in recent years have served to fill the gap left by production losses elsewhere, mine production growth continued to slow and has reached its lowest point since the financial crisis.

While this could be due to any number of factors, including under-performing sites, cash flow issues or regulatory changes, the collective result is less gold coming out of the ground. Although global demand for gold declined 7% in 2017, led largely by a decline in ETF investment inflows, expect investment demand for gold to increase as irrational exuberance is replaced with sensible asset rotation as fear returns to the fray in 2018.

The Bottom Line

Since the US Federal Reserve began its tightening cycle in 2015, the price of Gold has risen 25%, from prices in the range of $1080USD in August 2015, to its current range in the mid $1300’s. Gold’s recent rally gives bulls some fresh momentum even in an environment of rising interest rates. Should the DOW experience another severe correction, it will be in a bear market territory. Adding gold to your portfolio can protect your wealth in the event the value of investments such as stocks or bonds decline. Over time, gold has served as a hedge against inflation and the erosion of major currencies, making it an investment well worth considering. Don’t become an investor who missed a chance of success by neglecting to act on the bullish signals the gold market is sending your way.

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The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. We are not financial advisors and we do recommend you consult with a financial professional before making any serious financial decisions.