Gold price to reach US$1,350 in 2017
The 2016 LBMA forecast (London Bullion Market Association) for the gold price was an average of US$1,103 per ounce. With an average of US$1,160 in 2015, this was expected to be the fourth consecutive year of declines. In the end, the price finished the year at US$1,152 and was around US$1,251 average for the whole of 2016. This was the first increase in four years.
The driving force for gold’s rise last year was political risk and the Fed's postponement of interest rate hikes. Sustained political and economic uncertainty enhanced gold’s appeal as a "safe haven" investment. After the UK referendum, gold exceeded US$1,350 at one point in July.
Deferral US rate rises and continued low interest rates, provided an additional tailwind. After the US presidential election, gold fell back as political uncertainty declined somewhat, and expectations rose that rates would start moving up again. Against this backdrop, the dollar has also strengthened. So what is the outlook for 2017?
Global demand for gold has decreased sharply
According to the most recent World Gold Council report, world gold demand in the third quarter of 2016 was 993 tons, down by 10% compared with the same period in 2015. The average gold price for July-September was US$1,335, +19% over the same period the previous year (US$1,124 dollars). Meanwhile, supply increased to 1173 tonnes (+4%), due to a significant increase in recycling. This resulted in an oversupply of 180 tonnes.
Jewelry demand declines 21% to 493 tonnes due to the rise in gold prices. In terms of investment demand, bullion and coins also fell by 36% to 190 tonnes. Meanwhile, investment in ETPs (exchange traded products) increased by 146 tonnes in response to heightened political uncertainty in the wake of Brexit and the US election results. Europe, in particular, showed a remarkable increase in investment in ETPs. With some major elections due in Europe this year, ETP demand is likely to remain high.
By country, India, the world's largest market for gold, showed a 28% decline to 195 tonnes for the quarter. The second largest country, China, decreased 22% to 182 tonnes. Demand in India was dampened by the sharp increase in gold prices. The government’s move to tighten regulation on gold trading, to enhance accountability and improve transparency, was also a negative factor. However, demand for gold has been given a boost by the abolition of high value bills last November.
In China, soaring prices were also a key driver of subdued demand, along with a shift in consumer spending trends (from "physical consumption" to "experiential purchases"). In other words, an increasing number of consumers want to spend money on experiences (for example, travel) rather than on physical commodities, such as gold. This trend is especially noticeable among younger people, the “millennial” generation.
Professional commentators are divided between bullish and bearish
The World Bank Report, released in October last year, forecasted that the gold price in 2017 will fall to US$1,219 from US$1,250 in 2016. Its view is that the gold price is in a long term declining trend and may reach US$1,000 in 2025. However, opinion remains divided amongst the experts. A key downside risk for gold is typically a strengthening dollar as a result of rates moving up faster than expected. On the other hand, upside risks include ongoing geopolitical risk, rising inflation and concerns about economic stagnation.
Bank of America Merrill Lynch's forecast gold price for the middle of this year is US$1,200. It suggests that expansionary fiscal policy this year, allied to tight monetary policy, will support a rise in real interest rates. A rising dollar and an upward trend in interest rates will be a strong headwind for gold. In July last year, post-the Brexit announcement, BoA forecast a rise to US$1,500 dollars for 2017, but has subsequently revised this down.
Credit Suisse’s forecast gold price for this year (published in December) is US$1,338. Again, this is a downgrade from an original forecast of US$1,438 in October last year. UBS has published a forecast of a rise to US$1,350.
If interest rates rise but inflation also rises, it expects the gold price to remain firm. It assumes that an uncertain economic outlook in Europe, as well as continued quantitative easing by the ECB, should further underpin the gold price. UBS originally forecast a price of US$1,225 for last year, published in the LBMA outlook for 2016.
This was highest forecast out of more than 30 experts, and also an accurate estimate, considering that the outcome was an average of US$1,251 for the year.
Jeffrey Gandruck, a well-known investor with a reputation as “the Bond Guru”, is negative on the impact of Trump. In his view, gold will rise in the short term. Jim Rogers, another well-known investor, has an opposite view. "There is no doubt that interest rates will rise," he says of the Trump administration’s economic policy. Roger owns gold, but has not increased his position. His view is that the gold price will fall for a while.
Heightened political risk in Europe in 2017
Experts remain divided over the prospects for gold prices. The outlook is continually shifting, with the impact of Trumponomics hard to gauge. Our own forecast for gold this year is a range of US$1,050 to US$1,350.
Gold fell close to US$1,050 after the FOMC meeting in October 2015, but went on to recover subsequently. Last year, it fell again in December (touching US$1,143). It is currently around US$1,200. Even if the price falls from here we assume it will have support at US$1,050. This level is the break-even level for gold production: the market is well aware of this as a strong support level on the downside.
A rising dollar and rising interest rates could constrain US economic growth this year. Along with outflows from EMs, these may be factors which constrain a continued Trump rally. If the US economy falters, rate hikes may be postponed. In this scenario, gold would recover, and the US dollar may come off its recent highs. The FOMC in December 2015 anticipated there would be four rate hikes. In the event there was only one.
Political risk remains an issue in Europe in 2017. We are likely to see continued uncertainty with events such as the Dutch general election in March, the French presidential election in April, and the German general election in the autumn. Gold was temporarily above US$1,350 in July last year after the decision of Britain to withdraw from the EU. We also see this as the likely peak level for this year.