You might find it surprising that in a year in which the stock market was up more than 20%, gold investors would be happy with a more modest gain. Given that the yellow metal still has a long way to go before it can match its highest levels following a 12-year bull market run at the start of the 21st century, some gold market observers are impatient about the sluggish pace of its recovery over the past couple of years. Yet 2017 gave gold investors hope: Even though macroeconomic conditions were against the industry, the precious metal still managed to post a solid gain of between 10% and 15%. More importantly, a changing landscape could spur further price gains in 2018 and beyond.

GLD Chart

GLD data by YCharts.

Why did gold rise in 2017?

Gold started 2017 near $1,150 per ounce, with 2016 having seen an early rise in the yellow metal's price of about 25% that then gave way to weakness later that year. What set a negative tone early on for gold was the fact that stock markets were quite stable, with an almost unprecedented lack of volatility, which made precious metals' purpose as a perceived safe haven unnecessary. Moreover, the beginning of a more aggressive pace of monetary policy tightening in the U.S. held the specter of higher financing costs for gold investors, and some predicted that gold would struggle to hold on to its previous-year gains in 2017.

Yet several factors ended up supporting gold price gains over the course of the year. The long rise in the U.S. dollar against many major foreign currencies finally came to an end, with the dollar posting substantial losses, particularly against the euro and the British pound.

Rising geopolitical tension also led investors back into the gold market. North Korean nuclear ambitions prompted increasingly aggressive actions from the Trump administration, and fears of escalation continued to ramp up over the course of the year. Ongoing concerns about Russian tampering in the U.S. election, as well as developments in other global hot spots like the Middle East, also catalyzed interest in precious metals as a hedge against declines in other asset classes.

Gold bars with a yellow price chart line heading higher.

Image source: Getty Images.

Perhaps most important, though, was the fact that the bond market remained calm even with rising interest rates. Despite multiple hikes from the Fed, long-term rates stayed within a relatively tight range. Even lower bond yields in Europe persisted, making it easier for investors to borrow cash to invest in gold and other precious metals.

Picking up speed into the end of the year

By the end of 2017, gold had climbed back to around $1,300 per ounce. Spurring the last push of the year was the success of the euro in reaching the $1.20 mark, a level that the European currency has flirted with throughout much of the year. The U.S. government's decision to relocate its embassy in Israel to Jerusalem also renewed worries about geopolitics, with the United Nations voting overwhelmingly to call on its members to avoid similar moves.

The gold market was also bolstered by the rise of cryptocurrency trading. The huge gains in bitcoin during 2017 have reminded investors that assets other than stocks can produce good returns that are uncorrelated with most financial markets, and that in turn has refocused attention on commodities and other alternative assets. Gold looks positively cheap in bitcoin terms, with a single bitcoin having gone from purchasing less than one ounce of gold at the beginning of 2017 to more than 10 ounces by the end. That could make gold an attractive substitute for those looking for a store of value.

Can gold keep climbing in 2018?

Right now, the trends for the dollar and the bond market look favorable enough to support further gains for gold in 2018. Any surprise event in the geopolitical realm could spur temporary bouts of safe-haven buying, but the long-term prospects for the yellow metal will rely more on macroeconomic fundamentals. Even with more Fed rate hikes expected, bond market stability could help make 2018 another solid year for gold.