On the other hand, inflationary expectations do not signal a significant jump in inflation, as one can see in the next chart. And it’s not surprising, given the downward trend in money velocity, money supply, and credit growth, as the charts below show.

Chart 2: Inflationary expectations (5-year breakeven inflation rate, blue line, left axis) and velocity of M2 money supply (red line, right axis) over the last five years.

Chart 3: Money supply growth (M2, % change y-o-y) and the bank loan growth (% change y-o-y) over the last five years.

Hence, although there might be a pickup in inflation in 2018, the rise is likely to be only moderate. It is bad news for the gold market, as the yellow metal is perceived as an inflation hedge. It is not always true, but high inflation helps to keep real interest rates low. Without significantly accelerating inflation, real interest rates have more room to rise, which would be negative for the bullion.

Last but not least, investors should remember that there are not only upside risks, but also downside risks for the gold market, such as the sudden surge in the real interest rates or harsh appreciation of the U.S. dollar. Naturally, they are not imminent from the fundamental point of view, but the Eurozone economy remains vulnerable (think about non-performing loans in some southern banks or the crisis over Catalonia) – if another crisis burst in the Eurozone, the EUR/USD will decline, dragging gold prices down.

Summing up, there are some upside risks for the gold market, which could materialize in 2018. We do not consider them as likely, but the next year is far from being certain. We expect the boom to continue, but stock valuations are at preposterous levels and the risks are rising. And there is actually one more potentially bullish factor for the yellow metal. If the bear market in the greenback continues, the price of gold may rise, or remain in a sideways trend, at least.