Gold prices risk downside in 2017, but inflation fears, haven status will cushion

Gold prices risk downside in 2017, but inflation fears, haven status will cushion

Focus shifts to meeting of U.S. Federal Open Market Committee on December 13-14, with many analysts expecting a rate rise.

By David Brough

December 12, 2016 – Gold prices risk further slippage in 2017, driven by expectations of rises in U.S interest rates and a stronger dollar, but fears of inflation and the yellow metal’s appeal as a safe haven will provide support.

After five straight weeks of falling gold prices, some forecasters are predicting drops in the price of bullion in 2017, with Singapore-based Oversea-Chinese Banking Corp. on December 9 forecasting gold at US$1,150 an ounce between April and June, US$1,125 in the third quarter and US$1,100 by the fourth quarter. Gold was at US$1,157.10 an ounce on December 12.

Other forecasters predicting drops in gold prices in 2017 include ABN AMRO NV.

Gold has been hammered over the last five weeks by projections of faster economic growth when U.S. President-elect Donald Trump takes office, and by expectations of tightening U.S. monetary policy.

The recent share market rally in the United States has also dimmed the appeal of gold to investors.

Forecasts for a weakening of gold prices are driven by expectations of at least one rise in U.S. interest rates, starting with a widely expected hike after the U.S. FOMC (Federal Open Market Committee) meets on December 13-14. The FOMC is the branch of the U.S. Federal Reserve that determines the course of monetary policy.

Several analysts expect the dollar to strengthen further on the back of rising U.S. rates as economic growth in the world’s largest economy picks up, which will increase the cost of dollar-based gold in alternative currencies.

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WORRIES OVER INFLATION

A cushion for gold prices will be uncertainty over inflation, with those who are most bullish on gold prices in 2017 saying that the inflation outlook has been widely under-estimated.

Seeing chances of a gold rally early in 2017, Frank Holmes, U.S. Global Investors CEO and CIO, said international financial markets have not yet fully priced in the impact of inflation in coming months.

This could boost the allure of bullion as a hedge against inflation.

“We believe that markets are under-estimating inflation by 30-50 basis points and that is the key factor here,” Holmes, who is based in the United States, told Bloomberg TV. “I think inflation is going to be higher.”

He also said that Chinese demand for gold around Chinese New Year was likely to support gold prices, based on historic trends.

As well as the United States, Britain faces risks of rising inflation as the weak pound since the shock June 23 vote for Britain to leave the EU (Brexit), makes the cost of imported goods higher.

Renowned as a safe haven asset, gold will also be supported by instability and uncertainty if wars or conflicts extend and aggravate, forcing investors to seek safety.

Tragic events, such as conflict in the Middle East, can be seen as supportive of gold prices.

Gold represents a flight to safety for investors in turbulent times.

For UK jewellers and jewellery manufacturers, the weak pound since the Brexit vote has increased the cost of acquiring dollar-based gold and other precious materials, complicating procurement strategies.

A senior executive at one UK jewellery manufacturer/exporter said privately that 2016 had been on track to being a very strong year for the company – until the slide in sterling kicked in after the Brexit vote.

The outlook for the pound in 2017 will likely be linked to fluctuating sentiment over implementation of Brexit, with a key focus being on Britain’s future access to the single market.

Filigree gold jewellery manufacturing, ELEUTERIO, Portugal
Filigree gold jewellery manufacturing, ELEUTERIO, Portugal

 

 

David Brough is IJL’s Precious Metals and Gems Editor. David is Co-Founder and Editor of digital magazine Jewellery Outlook and writes monthly precious metals and gemstones Market News for Retail Jeweller magazine. He was a Reuters correspondent and editor for more than 30 years, including 16 years as a foreign correspondent, and covered commodity markets extensively. David won the United Nations A.H. Boerma Award in 2002-3 for his reporting on hunger issues. He graduated from St. Andrews University in Scotland with a MA (Hons) in Economics and French, and has a Certificate in Financial Markets from the Securities Institute of Australia. He speaks fluent French, Spanish, Portuguese and Italian.

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