Political and economic uncertainties set to give gold a bumpy ride

Many analysts bullish for year as a whole, seeing political turmoil counteracting the expected run of US interest-rate increases

PUBLISHED : Wednesday, 28 December, 2016, 7:20pm
UPDATED : Wednesday, 28 December, 2016, 11:01pm

A host of political uncertainties should give the gold market a bumpy year in 2017, according to gold traders and analysts.

Hang Seng Investment Services chief analyst Mark Wan expected the gold price to go down about 7 per cent from its current level to U$1,060 per ounce in the first quarter but predicted it would bounce back by year-end.

The gold price rose 6 per cent this year to US$1,144.11 per ounce as of December 28.

“The United States has increased the interest rate in December and would have several rate rises in 2017. In addition, the many presidential elections in several European countries from France to Germany are going to add pressure to the euro. These would help the US dollar to continue to trade strongly next year and would lead the gold price down in the following months,” he said.

“More importantly, India, the world’s second-largest gold consumer, was facing an economic slowdown due to the banknote problems which had hit the Indian economy and gold consumption hard,” he said.

Indian Prime Minister Narendra Modi on November 8 announced that 500 rupee and 1,000 rupee notes would be banned from midnight in a bid to curb corruption, counterfeiting, and use of cash to fund terrorists, illegal drugs and other crimes.

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Wan said this had caused a lot of trouble for many Indians who did not have credit cards or electronic banking; they had no physical cash to do shopping. India’s Purchasing Managers Index in November dropped to 47, a sharp fall from 54 in October.

He said China, the world’s largest gold buyer, had also faced an economic slowdown this year which would continue next year.

“China and India are the world’s biggest gold investors. Their economic slowdowns are not good news to gold price which I believe would go down to US$1,060 per ounce in the first quarter,” he said.

He said gold would go up again in the second half of next year however.

“When gold price would go down to US$1,060, many new gold mines would stop production as their production is at US$1,200 per ounce while the production cost for an old gold mine is at about US$800 per ounce. These would support gold to bounce back,” Wan said.

Gold ‘getting hit from all directions’ as investors flee funds

Joshua Rotbart, managing partner of J Rotbart & Co a Hong Kong-based firm specialising in investments in gold and other precious metals, expected next year would be a volatile year for gold trading at an average US$1,250 per ounce assuming there would be no major geopolitical crisis.

“Investors still have a very positive sentiment towards a new administration in the US so the fear factor, which drives the price of gold up, is quite low at the moment. We also believe that with gold at the current price level, more interest [rate increases] by the Federal Reserve are already priced in,” Rotbart said.

“On the other hand, Trump’s polices may increase the federal deficit even more, and unity in Europe is still being questioned by populist leaders. We predict that Russia and China will continue flex their muscles, which means a positive effect on gold.”

Rotbart is positive on gold demand. His company plans to expand further in serving investors wishing to buy and store physical precious metals.

“We plan to offer our clients use of the gold they store with us as a collateral against lending, thus turning it to an asset that can generate other revenues. We also plan to extend our network of storage locations, specifically in Asia-Pacific region,” Rotbart said.

Haywood Cheung Tak-hay, the honorary permanent president of the Chinese Gold and Silver Exchange Society, said the many elections in Europe next year and the new trade policy under the US president-elect Donald Trump would lead to market uncertainties. He believed the gold price would move between US$1,100 and US$1,377 per ounce in the next few months and would go to US$1,500 per ounce in the second half of next year.

“The devaluation of yuan would led more mainlanders buy gold to hedge the falling value of the yuan,” Cheung said.

The devaluation of yuan would led more mainlanders buy gold to hedge the falling value of the yuan
Haywood Cheung Tak-hay, Chinese Gold and Silver Exchange Society

King International Financial Holdings chief executive Jasper Lo Cho-yan is more bullish, believing the gold price will go up 50 per cent to reach US$1,800 per ounce at the end of next year.

“Investors would turn to gold as a safe haven whenever stock markets and the economy looked shaky,” Lo said.

Capital Link International chief executive Brett McGonegal however disagreed as he believed the theory that investors would buy gold as a hedge against inflation and stock market falls was outdated.

“First, gold is no longer the hedge for strong dollar, rate hikes and weak equities. The yen has proven to be a more correlated play offering better liquidity and better hedge. Second, the market will rally next year because of the US president Donald Trump’s fiscal policy that will result in stronger dollar, rising rates and rising equities,” McGonegal said.

“I think gold prices will drop a bit from here and stay around these levels. You will see spikes in gold during periods of uncertainty between reflation and Fed policy syncing up but those spikes will be short lived.

“The only thesis in my mind that would drive gold higher is the Fed being too far ahead of the reflation story and hiking too quickly before the inflation kicks in,” he said.