Gold
enjoyed a stellar return in 2016. What was so unusual about the gain is
that at the end of December 2015 and at the start of the following
January, the expectations, fears and even the charts were all pointed to
a higher chance of weakness rather than strength. Gold was seriously at
risk of falling back under $1,000 an ounce, and maybe heading to $900,
But the world changed, with geopolitics, deflationary pressure, more
quantitative easing, negative interest rates, Brexit and so on. Gold
ended up for 2016 about 10% higher in dollar terms and closed out close
to $1,150 per ounce.
Now
we have word from the World Gold Council (WGC) that multiple issues
should support a strong demand trend in 2017. Note though that the WGC
is a pro-gold industry group that obviously favors higher gold trends
over big selling pressure.
In
2016, gold-backed exchange traded funds (ETFs) increased their total
gold holdings by 536 tons, or about $21.7 billion. This was the highest
gain since 2009, even after considering that U.S.-listed gold-backed
ETFs saw a drop of more than 40% in their gold holdings in the fourth
quarter of 2016.
As
2017 gets off to its start, there have been concerns raised that the
strong U.S. dollar may limit how much investors want to own gold. The
WGC's view is that there are six major trends that will support gold
demand in 2017.
The
first issue is a heightened political and geopolitical risk landscape.
Gold is often considered and treated as the ultimate safe haven in times
of uncertainty.
The WGC's view is that political risk is rising with
key 2017 elections in France and Germany, while Britain negotiates its
exit from the European Union. On the U.S. front, this was described as
follows:
In
the US, there are positive expectations about some of the economic
proposals of President-elect Donald Trump and his team, but there are
also concerns. The US dollar has gained ground since Trump swept to
victory last November, but uncertainty is rife. Jim O’Sullivan sees “a
meaningful risk that negotiations on trade will turn belligerent" and
suggests that “confidence in markets could be affected by geopolitical
tensions triggered by the new administration”.
Currency
depreciation is expected to be seen as policies vary from the United
States and other nations. Central banks have continued to acquire gold.
The main reason is to diversify their foreign reserves. The WGC expects
central banks to continue acquiring gold in 2017.
Another
boost is expected to come from rising inflation expectations. A rising
rate environment in the United States might favor investors buying
interest-bearing notes, or at least keeping cash accounts if they pay
interest (after all, gold pays no interest). Still, upward inflationary
trends are supposed to be solid for gold as a hedge. Also worth
considering is that even the expected rise in rates is that real
interest rates should remain low by historic standards. Inflation also
may make bonds and fixed income less appealing to long-term investors.
Whether
or not you believe equities to be overvalued, the WGC cited inflated
stock market valuations as another feather in gold's cap. The WGC did
not use value-specific number, but the S&P 500 is valued at close to
17 times forward earnings. The council did cite the U.S. equity market
being at all-time highs. Gold’s role in diversifying portfolios was used
as a metric for driving demand.
Another
issue driving gold demand trends in 2017 was pointing toward long-term
Asian growth. This may be nothing new to those who have followed gold
and economic growth trends in the modern era. Still, the WGC did note
that the combined share of world gold demand rose from 25% for India and
China in the early 1990s to over 50% by 2016. Other gold markets in
Vietnam, Thailand and South Korea are also called as vibrant.
The last driver for the World Gold Council is the opening of new markets. Here report noted the following:
- China has seen dramatic growth via Gold Accumulation Plans and physically settled gold contracts in the Shanghai Gold Exchange.
- The Accounting and Auditing Organization of Islamic Financial Institutions, with support from the World Gold Council, launched the Shari’ah Standard for Gold.
- Pension funds in Japan have increased their gold holdings over the past few years.
As
mentioned, gold closed out 2016 close to $1,150, and it was last seen
around $1,190 after having been at $1,200 earlier in the week. Gold was
up to a peak range of $1,300 to $1,350 in the summer of 2016. Also, the
$1,300 mark was the peak in 2015. A 10-year gold chart from Kitco has
been provided below.
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