REVIEWING GOLD PRICE MOVEMENTS IN 2016 AND OUTLOOK FOR 2017- Shri. V.P. Nandakumar
In predicting the future price of gold, analysts are a divided lot. Some have revised downward their earlier forecast while others are scaling it up higher. Various commodities experts predict gold price to range bound between US $1250 an ounce to US $1300 an ounce level by 2017. Some of the prominent forecasts are given below:
- Bank of America Merrill Lynch (BoAML) is expecting gold to trade around US $1,200 an ounce by mid-2017, implying limited upside near-term.
- Goldman Sachs raised its average gold price forecasts to $1,260, $1,261 and $1,250 per ounce, from $1,202, $1,150 and $1,150 for 2016, 2017 and 2018, respectively.
- Analysts at the Canadian bank RBC said that they are increasing their 2017 and 2018 gold forecasts, expecting prices to US $1,500, up from the bank’s previous forecast of US $1,300 an ounce. However, the bank sees prices declining to US $1,300 an ounce by 2020.
- Swiss bank UBS forecasts gold prices to average US $1350 an ounce in 2017, characterising the metal as “down but not out” after significant declines.
- BMI Research has revised its forecast gold price for 2017 downwards to US $1 300 an ounce, from the previously anticipated US $1 400 an ounce. This, after Republican candidate Donald Trump was elected the next President of the US, and the later decline in gold prices.
Our view
If the outlook for gold had dimmed at the beginning of the new year, it had to do largely with the comments emerging from the US Federal Reserve hinting at 3 more likely rate hikes in 2017. Also, President-elect Trump’s plans to open up the fiscal tap to fund huge investments in infrastructure while also talking of cuts to corporate and personal income taxes. The resultant deficit will be inflationary and compel the US Fed to raise interest rates, attracting inflows and strengthening US dollar (and weakening gold).
However, our recent experience with the US Fed that they have been unable to deliver on the promised pace of normalisation of interest rates. In the beginning of 2016, indications were of four rate hikes while the reality turned out to be only one. In the early years of quantitative easing (QE), the US Fed would cite weakness in the domestic economy, especially high unemployment, to delay normalising rates. But in 2013, when the Fed announced that they would taper off their programme of QE, there was panic and heavy selling in bond markets. There was significant outflow of hot money from emerging markets including India and their currencies depreciated sharply against the dollar causing instability in the global markets (so called taper-tantrum).
Therefore, having followed unconventional monetary policies for so long, the US Fed appears to have grasped a tiger by the tail. Exiting from these unconventional policies may be easier said than done. The Fed will now have to factor in the effects of its decisions on the global economy too because any measure that induces turmoil in the international markets will eventually pull down the domestic US markets too given the inter-linkages.
Further, while Trump’s plans to ramp up spending on infrastructure and cutting corporate taxes has enthused markets, the increase in fiscal deficit will be inflationary. Our long term experience with inflation is that inflation invariably pulls down growth. Besides, currencies subject to inflation lose their “store of value” function and this can spark a revival of interest in gold as inflation-hedge. Therefore, while gold prices may fall further in the next three to four months, the fundamentals for gold still hold good with so many central banks across the world engaged in depreciating their currencies by monetary easing.
Lastly, if Trump follows through on his protectionist rhetoric and sparks a trade war with, say, China or Mexico, the resulting uncertainty will likely make it difficult for the US Fed to raise interest rates. And, any pause in normalising interest rates, will once again provide support to gold.
Summing up, the bearish outlook on gold price at the beginning of the year was premature. In our view, gold is more than likely to hold its own over the next year.
(Shri. V.P. Nandakumar
MD & CEO of Manappuram Finance Ltd.
and the Chairman of CII’s Kerala State Council. )
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