Gold Market Commentary – Tue 3 Jan, 2017
How did gold and silver really do in 2016 and where are they headed this year?
Here is a recap of the gold market by our friend Lawrie Williams. He brings up a lot of points that I agree with on the main drivers (up and down) for gold this year… Trump, US market moves including a potential major drop and the USD.
Gold is, as usual, somewhat unpredictable. Its performance in 2016 will have been very much dependent on the performance of your local currency vis-à-vis the US dollar. Even in the latter the actual year-end price is also dependent on location and timing. For example year-end prices in US dollars in Shanghai, London and New York were sharply different – respectively US$1,185, US$1,159 and US$1,151 based on the SGE final benchmark price for the year, the final LBMA gold price setting in 2016 and the final New York spot price.
We can’t view SGE comparisons for the full year as it only commenced announcing its benchmark prices back in April, but from the final LBMA price for 2015 to that in 2016, gold rose 9.1% over the year. In terms of New York prices gold rose a slightly smaller 8.5% over the year. On the other hand in Russian rubles the gold price FELL by 10.6% over the year as the ruble appreciated against the dollar after a very sharp fall in 2014/15. On the other hand, in the Pound Sterling, the UK gold price rose 22.5% over the year! The Brexit vote effect!
But, as far as the media is concerned it tends to be the US dollar price which is the only one which matters so let’s look at the prospects for the gold price in the year ahead in US dollars – and for the other precious metals as well.
While global geopolitics and economics all have an effect on the dollar price of gold, it will almost certainly be the US itself and the impact on it of the Trump Presidency’s policies which will be the primary gold price drivers. If President Trump is perhaps as unpredictable as his performance through the runup to the election suggests then we could see some major domestic and foreign policy upsets in relation to what has gone before. Trump’s stated policies on the US economy have proved popular with Wall Street, but may well not fly – at least not nearly as quickly as the general public might expect, or even at all. This could all see a reversal in the seemingly inexorable advance of general equities and an about-turn by the Fed in terms of interest rate rises, both of which would likely see a boost in the gold price. Indeed general equities could crash given that they look to be overbought and in most cases earnings don’t look sufficient to justify the high prices currently prevailing. At some stage the stock price bubble will surely burst. Some ‘experts’ are predicting a crash of epic proportions – perhaps 80% -but although this is indeed possible we reckon that if there is a major correction ahead it will be more in the order of 50% as in the 2008/9 crash when the Dow fell around 55% at one time.
Should an equities market crash of this magnitude occur again, similarly to 2008 the gold price could be brought down sharply too as funds and investment houses struggle for liquidity and a fall to $1,000 or thereabouts wouldn’t be out of the question but again, as in 2008/09, gold would likely recover far faster than equities and then go from strength to strength as its safe haven role would become paramount again. Where gold might end 2017 therefore could be a matter of timing. If equities don’t crash, but perhaps correct by say 10-15%, then gold could well hit the $1,400 mark during the year. If there is a major equities crash and it happens early in the year, gold could still hit the $1,400 mark – and steam on upwards in 2018, but if there is an equities market crash, and it peaks in the final quarter of the year then gold could well end the period in a much weaker position – but still steam ahead in 2018.
On Foreign policy there would appear to be, on the face of things, the likelihood of a rapprochement with President Putin’s Russia – if Congress allows this to take place. The nomination of Rex Tillerson as Trump’s Secretary of State certainly suggests a change of relationships here, although it is yet possible that Tillerson’s nomination may be rejected by the Senate. Trump may well be trying to take a leaf out of President Ronald Reagan’s book whose positive relationship with Russia’s Mikhail Gorbachev led to the end of the arms race, perestroika and effectively the end of the US/Russian stand-off, which now seems to be being resurrected by the current leaderships of two of the world’s three superpowers. But while Trump may be heading towards a less hostile relationship with Russia, he also looks as though he may also be stirring up problems ahead with the third major superpower, China.
Domestic and foreign policy uncertainties may form the crux of a gold price resurrection in 2017. This may already have started in 2016, but big financial sector interventions from around mid-year succeeded in nipping that in the bud – even so gold was up around 8% over the year and silver an even higher 15%. This was after being up respectively around 25% and 45% immediately after the US independence Day holiday – a turnaround date which saw inflows into the world’s largest gold ETF switch to major outflows (See: GLD Drops 158 Tonnes Since Independence Day). The referenced article looks at the seemingly pivotal impact of major holidays in the USA seemingly often providing the inflection points for complete changes in investment sentiment with respect to precious metals prices.
Where all the political and economic uncertainties which lie ahead will impact is probably on the strength, or otherwise, of the US dollar. It is currently riding high, in part due to the US Fed’s 25 basis point interest rate rise and the avowed prospect of two or three more such increases during the year. But those with even short memories may recollect that the Fed promised the same thing for 2016, but didn’t deliver. Could it be déjà vu all over again in the immortal words of Yogi Berra! We doubt the Fed will move until after it sees the initial impact on investment sentiment of the Trump Presidency. The Fed’s FOMC meetings this year are scheduled for Jan. 31-Feb. 1, March 14-15, May 2-3, June 13-14, July 25-26, Sept. 19-20,. Oct 31-Nov. 1 and Dec. 12-13, thus we doubt any move to raise rates will happen until at least the May meeting, and perhaps not until June unless there’s a huge (and in our view totally unjustified) equities surge immediately following Trump’s accession to the White House. If Trump’s supposedly business-friendly initiatives run into serious opposition in Congress then the dollar may well suffer.
But, there’s little doubt that dollar strength will be important for the gold price and the prospects of a trade war with China and the unwinding of some other key trade agreements, which Trump appears to wish to implement, could be destabilising for the greenback. It is also perhaps not in US interests for the dollar to appreciate further – the dollar index (DXY) is currently comfortably above 103 which is a new record having varied between 91 and 103 during 2016, and this may colour the Fed’s thinking on interest rate rises too. A high dollar makes US exports less competitive (which is why so much US company manufacturing activity has moved offshore), and imports cheaper, which would be a further blow towards trying to balance the nation’s current account. We suggest that, over the course of the year ahead, the Fed will move surreptitiously to bring the dollar index down to perhaps a level of around 95, which is not conducive to further interest rate rises and which is gold positive.
While gold opened higher in early New Year trade, it rapidly lost ground, falling below the key $1,150 mark in Europe. It remains to be seen how the US will react once markets open there. But again, in 2016, it opened the year weaker before surging upwards. Will this year see a repeat?
If we are correct in our assumptions about gold and we do see something of a repeat of 2016, then silver will do even better. The gold:silver ratio (GSR) has slipped back to over 72, up from around 66 when silver peaked in mid 2016 (it had started the year near 80 and at one stage had risen to close to 84) but we think that if gold does perform then a GSR of around 65 could be seen again given silver tends to outperform gold in a rising gold scenario – and if gold hits $1,400 then silver could rise to over $21, still a huge way short of the near $50 it hit back in 2011 before a massive price takedown.
So overall a positive view of the gold price in the year ahead and perhaps an even more positive one on silver, BUT if there is a general equities crash as many doom and gloom merchants are predicting (and the uncertainties surrounding the Trump Presidency would perhaps make this even more likely) then booth gold and silver could suffer heavily in the financial fallout. The comfort here is that would likely not be as intense a fall as the equities market and the recovery would be far quicker.