Donald Trump inauguration

Buy gold, sell yuan to brighten a Trump year, analysts say

As Donald Trump prepares to take office next week, analysts predict a year of weaker yuan, rising prices in precious metals

PUBLISHED : Friday, 13 January, 2017, 6:41pm
UPDATED : Friday, 13 January, 2017, 11:33pm

Investors should sell the yuan and put their money into precious metals in 2017, as the presidency of Donald Trump may herald an era of potential trade conflicts and higher interest rates, analysts said.

The yuan may weaken to 7.25 per US dollar in 2017, extending its losing streak for another year amid anxieties over Trump’s trade and economic policies and the likelihood that he would take punitive action against Chinese exports, according to the consensus of 10 analysts surveyed by the South China Morning Post.

“Trump’s actual policy delivery and his stance against China are critical to the US dollar and the yuan’s direction in 2017,” said Ken Cheung, Asian currency strategist at Mizuho Bank, who is forecasting the yuan to weaken to 7.17 per dollar in 2017.

To stem the yuan’s slump and deter the capital flight from China, the Chinese central bank tightened rules to make it harder for companies and individuals to remit funds abroad. Offshore investments exceeding US$1 billion are now subject to additional scrutiny and require more approvals, while cash withdrawals on automated teller machines are curtailed.

Offshore yuan (CNH) rate rose about 1 per cent against the dollar so far this year, a remarkable rally that has kept the yuan’s value at above 7 per dollar. Offshore yuan strengthened to 6.8502 per dollar as of 6pm on Friday.

Still, the rally might merely be temporary, said Credit Suisse’s Asia-Pacific chief investment officer John Woods, whose bank expects the Chinese currency to weaken to 7 per dollar during the first quarter and further deteriorate to 7.30 by the end of the year. “Ongoing concerns remain regarding China’s persistent capital outflows,” he said.

With a deteriorating currency, the Chinese central bank had been spending more of the country’s foreign-exchange reserves to buy the yuan, sell the dollar to defend the yuan’s value. China’s reserves fell by US$40 billion to US$3.01 trillion at the end of December.

Volatility in the currency market may drive investors towards the sanctuary of gold, silver and platinum, which are expected to increase in value after Trump’s inauguration next week.

Precious metals might also get a boost from the start of the Lunar New Year in late January, traditionally an auspicious period of gift giving in China, the world’s largest market for gold, said Jingyi Pan, a strategist for IG Group.

The price of gold may rise about 5 per cent to US$1,260 per ounce this year, according to the average estimate in a survey of six analysts by the Post. Silver and platinum might also gain, analysts said.

Still, precious metals might only be able to maintain their lustre in the medium term as an aggressive interest rate policy by the US Federal Reserve might cap prices, analysts said.

The price of gold would depend on Trump’s policies on infrastructure spending, tax cuts and other stimuli, of which there had been scant details, Bank of America Merrill Lynch analysts said.

If Trump’s increase in deficit spending is modest, bond yields will remain flat, which is positive for gold. Conversely, if large deficit spending drive up bond yields, the US Fed will be compelled to act aggressively in raising rates, which will have a negative impact on gold.

The uncertainties would generate some strong demand in the first half, CIC Investor Services’ head of investment solutions Edmund Yun said.

“We may see some corrections in gold price going into the second half if the rate-increase scenario plays out as we’d expected,” Yun said.

Trump and his cabinet nominees have struck muscular postures towards China over territorial claims and the right of navigation in the South China Sea. Any increased geopolitical tension would enhance the stature of precious metals as safe havens for investors, analysts said.

“To offset declining exports, China may turn to additional stimulus of its domestic market, increasing infrastructure spend, loosening credit and reducing taxes on domestic consumer goods. Under such a scenario, a trade war or a similar scenario may provide an unexpected short-term boost to precious metal prices,” Barclays’ analysts Michael Cohen and Dane Davis said.

Wang Rong, an analyst for Guotai Junan Futures, shared the views and had a “neutral and slightly positive” outlook for precious metals.

“Investment demand triggered by risk-off sentiment will support precious metals in 2017 periodically,” Wang said.

In the longer term, Yun said precious metals related to construction could move up in the next few years as demand was set to increase if the global economy gradually recovered and the US boosted its infrastructure spending.

Additional reporting by Enoch Yiu