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Why gold shares like Newcrest Mining Limited (ASX:NCM) could outshine the market in 2019

Don’t give up on the gold price. The price of the precious metal is tipped to run higher over the next 12 months, according to Bank of America Merrill Lynch (BoAML).

This is because the bank believes the market will soon refocus on the US budget blowout from US President Donald Trump’s big tax cuts that will send its economy deeper into debt, while its trade war with China slows economic growth, reported Bloomberg.

What is bad news for the world’s biggest economy will be good news to ASX-listed gold producers like Newcrest Mining Limited (ASX: NCM), Northern Star Resources Ltd (ASX: NST) and Evolution Mining Ltd (ASX: EVN).

The yellow metal is struggling to hold support at US$1,200 an ounce with the price of gold flip-flopping on both sides of this line as Trump escalated his tariff war with China. The trade war has so far forced investors to flee into the arms of the US dollar for safety and they have dumped just about all other safe-haven assets, including gold.

But this could be about to turn with BoAML forecasting bullion to average US$1,350 an ounce in 2019, and it isn’t the only gold bull. Goldman Sachs sees gold trading at US$1,325 per ounce in 12 months while other experts are sounding the alarm on the burgeoning US budget deficit – a driver for a higher gold price and lower US dollar.

The Congressional Budget Office is predicting that the deficit will grow to US$1 trillion in 2020 when Trump’s tax cuts are combined with new federal spending. This has forced the US government to lift note and bond sales to levels last seen in the aftermath of the GFC that ended in 2009, according to Bloomberg.

The near-term outlook for gold isn’t great as rising bond yields and the appeal of the greenback will curtail interest in the zero-yielding asset but if investors start to grow nervous about the US government’s ever-larger borrowing campaign to buy itself out of a downturn, gold will pop higher.

Of course, the fortunes of our gold producers aren’t only dependent on the US-dollar price of the precious metal. The Australian currency and production outlook will also have a significant bearing on where these stocks head in 2019.

But a return of the gold bulls will certainly bolster interest and sentiment towards the sector – and that can only be a good thing.

The share price performance of our gold stocks has been mixed so far. Our largest gold producer Newcrest is slumped 11% into the red over the past year but mid-tier gold stocks like Northern Star, St Barbara Ltd (ASX: SBM) and Evolution are up 74%, 45% and 27%, respectively.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 9% over the same period.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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