Last week, the World Gold Council presented its outlook for the gold market in 2017. What can we learn from the publication?
The WGC points out six major trends that will support demand for gold throughout 2017: 1) heightened political and geopolitical risks; 2) currency depreciation; 3) rising inflation expectations; 4) inflated stock market valuations; 5) long-term Asian growth; 6) opening of new markets. Let’s analyze them one after another.
- Heightened political and geopolitical risks. The authors believe that political risk is rising due to key elections in Europe, Brexit negotiations and uncertainty about Trump’s policies. Hence, gold will benefit from the safe-haven demand, they argue. However, most of the risks concern Europe, not the U.S. Moreover, the biggest threats, such as the Brexit referendum and the U.S. presidential election, are behind us. Moreover, the global markets showed a lot of resilience last year. Therefore, we do not argue that gold will not benefit from the uncertainty, but investors should not overestimate this impact.
- Currency depreciation. The report argues that the ECB is likely to continue its monetary policy, leading to fears of currency depreciation and the strengthening of gold prices. It’s pure nonsense, especially that authors note that “monetary policy is likely to diverge between the US and other parts of the world”. If this is the case, then the U.S. dollar will appreciate, while the yellow metal will weaken.
- Rising inflation expectations. According to the authors, an upward inflation trend will support demand for gold, by lowering real interest rates and increasing gold’s appeal as inflation hedge. However, gold is not the perfect inflation hedge. And the current inflationary trend seems to stem from the uptick in economic activity. Thus, real interest rates may not be lowered.
- Inflated stock market valuations. The report believes that stock valuations are elevated, so gold will benefit as a portfolio diversifier. Surely, it always good to have some precious metals, but the current stock bull market hardly paints a picture of an euphoric exponential bubble. Only time will tell.
- Long-term Asian growth. The authors argue that macroeconomic trends in Asia will support economic growth, driving gold demand. However, as we repeated many times, the Asian physical demand is not the driver of the price of gold. Instead, gold is a bet against the U.S. dollar, hence it rises when the U.S. economy struggles.
- Opening of new markets. Gold is becoming more mainstream, as more and more pensions funds invest in the yellow metal. And the Shari’ah Gold Standard is a game-changer. Hence, the report believes that we will see a structurally higher demand. We welcome the rising popularity of the shiny metal as an investment, but it does not necessarily need to lead to higher demand.
Summing up, the WGC’s gold outlook for 2017 is bullish. It is not surprising, since the WGC is always bullish on gold, as it is the market development organization for the gold industry. The report points out six themes which are supposed to support the gold market this year. We suggest taking them with a pinch of salt.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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