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Outlook 2017

Refile: Gold At the Mercy of Trump, The Fed & European Drama in 2017

Editor's Note: Kitco News has officially launched its 2017 Outlook where we ask if this is the start of a new Raging Bull market. Be sure to catch all our coverage here, which includes gold forecasts, special technical reports and of course, our popular Invest Like The Experts Series. We will also be launching a new feature so be sure to stay tuned!

(Kitco News) - Analysts expect gold to be at the mercy of President-elect Donald Trump and his fiscal policies that are expected to push the U.S. dollar, bond yields and rates higher in 2017.

But, could markets be getting ahead of themselves as to how much Trump can overheat the U.S. economy?

Barry Potekin, vice-president of future accounts at RMB Group, said that if Trump is able to get everything that he wants, it could push 10-year yields above 3% and push gold back down to multi-year lows.

“Higher bond yields will be bad for gold but I think we will see a great buying opportunity,” he said. “But any drop in gold is great opportunity to position yourself for long-term gains.”

However, for many economists and analysts, Trump’s plan to spend $1 trillion over 10 years rebuilding the nation’s infrastructure is still not a sure bet. And, if Trump’s fiscal plans don’t materialize, that could ultimately push gold into a new raging bull market next year.

Of course analysts aren’t necessarily giving up on gold even if Trump is able to move his spending plans forward, as it will take time for the government to pass any spending bills and it will take time for those effects to filter through to the economy.

“I think Trump, as soon as he gets in, is going to learn that the government wheels turn very slowly,” said Adrian Day, president of Adrian Day Asset Management. “I think it is safe to say that the impact of Trump’s policies by year-end next year will be a very big unknown and that will be good for gold.”

David Mazza, head of ETF and Mutual Fund Research at State Street Global Advisors, said that in their base-case scenario, if the government does approve new fiscal spending, it won’t come until the end of 2017 or even early 2018.

“Everyone is prepositioned for this fiscal spending and we just don’t know what it is going to look like,” he said. “Most of the politicians are fiscally conservative and it will be very difficult to get fiscal stimulus policies passed while the economy is expanding.” 

Mazza also agreed that lower gold prices in 2017 should be seen as a buying opportunity. 

“Gold is the original alternative asset,” he said. “Investors should be less worried about where gold is going and more focused on how they can use it as part of a diversified portfolio.”

The Federal Reserve

While the Fed is projecting three rate hikes next year, analysts noted that there is a stark difference between what they expect and what will really happen.

In 2015, the Fed saw the potential for four interest rate hikes in 2016 but in the end, they were only able to deliver one.

Day said that it might not be clear right away that the Fed won’t be able to raise interest rates as much as they expect but once it does, gold will benefit.

“Right now, I think things are pretty negative for gold but there are still reasons to be bullish,” he said.

Specifically looking at interest rates, Day said that he sees two rate hikes in 2017 but the central bank will likely have trouble keeping up with inflation pressures.

Even by the Fed’s own projections, real interest rates are expected to be negative, which could be positive for the yellow metal. In its latest Summery of Economic Projections, the median forecast for Fed fund futures is 1.4% by the end of next year. However, the central bank expects inflation to rise 1.8% in 2017.

“When the Fed raises interest rates it will be from behind the curve,” he said.

Maxwell Gold, director of investment strategy at ETF Securities, agreed that inflation will outpace interest rate increases.

Gold added that there is too much optimism priced into the markets, noting that equity valuations are above their 10-year averages. He added that there is still too much uncertainty for markets to be this optimistic.

Will 2017 See Another European Crisis?

While U.S. interest rates play an important role in the gold market, analysts also warn that investors shouldn’t ignore the geopolitical uncertainty that is brewing in Europe.

“We can expect to see episodic volatility and that will make gold an attractive risk management tool,” said Gold.

Some of the key events in 2017 that are expected to drive volatility include: Italy’s new government, and whether or not it will be able to resolve the country’s financial instability; Brexit negotiations, which the U.K. government hopes to start in March; Greece’s need for another bailout package; elections in France as right-wing, anti-Eurozone parties are gaining momentum; and, elections in the Netherlands, which is also seeing growing popularity among euro sceptics.

“We can expect Europe to be in the headlines a lot next year with increasing chance of seeing a major crisis,” said Day.

He added that gold prices could rise to between $1,375 and $1,400 an ounce by the end of the 2017 because of global uncertainty. ETF Securities also has a year-end price target of $1,400 an ounce.

Physical Demand?

Not only has the gold market been plagued by a stronger U.S. dollar and higher bond yields, but physical demand in two key markets has been weaker than expected.

In November, Indian Prime Minster Narendra Modi’s banned 500 and 1,000 rupee notes to crack down on the nation’s growing underground economy. The black market also took a toll on the gold market as these high denomination bills were used to purchase jewelry as way to launder proceeds from illegal activity. In order to address black market money, the government has instituted a 1% tax on all cash purchases above 200,000 rupees and is reviewing whether or not to ban cash transaction above 300,000 rupees.

Commodity analysts at Commerzbank said that India’s new focus on cleaning up its economy is expected to reduce gold demand in the first quarter of 2017.

Aside from India, rumors also started came out in early December that China has “unofficially” restricted gold imports into the country. Banks that have a government license to import gold have said that the People’s Bank of China has been slow to approve transactions.

The fourth quarter is traditionally seen as an important season for Chinese demand as businesses import the precious metal in preparation for Lunar New Year celebrations at the end of January.

While these two markets are gaining more market attention, Mike Dragosits, senior commodity strategy at TD Securities, said that even if demand does weaken, it will not completely disappear.

Any restrictions on gold imports in India and China will lead to more smuggling and growth of the black market, which is something both countries want to avoid, he explained.

“What is really going to matter for gold in 2017 is investor demand and we think that it will pick up next year as the Fed is not going to be aggressive as it wants to be,” he said.

By Neils Christensen of Kitco News; nchristensen@kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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