6 Important Trends for Gold in 2017

To continue our look at the year ahead from yesterday, we today summarise the World Gold Council’s 2017 forecast taking inputs from 3 more esteemed analysts, namely Jim O’Sullivan (Chief US Economist at High Frequency Economics, dubbed ‘most accurate forecaster in America over the past 10 years’ by MarketWatch), John Nugée (renowned economic and geo-political commentator and former Reserves Chief Manager at the Bank of England), and David Mann (award-wining economist and Chief Economist for Asia at Standard Chartered Bank).  They list 6 main drivers for strength in gold this year.  If you want to read the full report, click here, otherwise below is a summary.

1. Heightened political and geopolitical risks 

2017 promises to be a turbulent year in geopolitics.  On Friday we have the biggest wild card in history being inaugurated as the leader of the free world, we have European elections of the 3 major EU countries “against a backdrop of continued citizen unrest, fuelled by the ongoing uneven distribution of economic welfare.”, and of course Brexit actually happening.  Interestingly the report doesn’t touch on the middle east… Are we becomingly numb to the constant threat this presents?

2. Currency depreciation 

Whilst the US looks set to continue to tighten monetary policy they believe we will likely see a divergence between the US and other parts of the world as ‘monetary easing’ continues elsewhere, devaluing currencies accordingly.  “Exchange rates have historically been the key channel through which Asian economies have adjusted to higher US interest rates”.  Whilst also mentioning Europe and the UK specifically we could we expect the AUD to fall this year too, seeing an increase in the AUD gold price.  They also point out the continued buying of gold by central banks. 

3. Rising inflation expectations 

Whilst nominal interest rates look to be on the increase (on both US Fed rate rise and bonds crashing) they may well be less than the growth in inflation and hence continued negative or low real rates. “An upward inflationary trend is likely to support demand for gold for three reasons. First, gold is historically seen as an inflation hedge. Second, higher inflation will keep real interest rates low, which in turn makes gold more attractive. And third, inflation makes bonds and other fixed income assets less appealing to long-term investors.”  Surprisingly rising inflation was always going to be inevitable after all the stimulus via money printed or available for near zero rates for so long.  They see this year as that playing out.

4. Inflated stock market valuations 

We wrote at length last year about how historically overvalued the US (in particular) sharemarket is and how it is now the 3rd longest expansion in history.  To date bonds have been the preferred safe haven for diversification against the inevitable crash but rising rates sees that less attractive.  “In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.” Or as John Nugee says: “Portfolio resilience and diversification in the face of shocks will be key”.  Tick tock tick tock….

5. Long-term Asian growth 

Asian gold demand is generally consistent with increasing wealth.  “The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016.”  They believe Asia as a whole has reduced its economic reliance on the west since the GFC and will grow largely on domestic demand.  They believe Asia will account for 60% of global growth in 2017.

6. Opening of new markets.

Negative rates in Japan and parts of Europe have seen new investment vehicles for gold emerge or strengthen as pension funds and others start allocating into gold.  We also saw the historic announcement late last year that changes to Islamic law allowed gold as an investment, prompting this from Dr. Mark Mobius (Executive Chairman, Templeton Emerging Markets Group)  “[The Shari’ah Standard on Gold] will enable the foundation of what could be the most significant event for Shari’ah finance in modern times”