REVIEWING GOLD PRICE MOVEMENTS IN 2016 AND OUTLOOK FOR 2017- Shri. V.P. Nandakumar 

As we enter the new year, the time is right to take a look at something close to all our hearts. Yes, it is gold, more precisely the price of gold and how it is likely to move in the new year.  In order to get a sense of where gold is headed over the next year, it is best to begin with a review of how gold prices moved in the past, particularly the last one year. Therefore, let us start with a summary of gold price movements in the international markets over the last five years.

The international price of gold experienced a steady and continuous upward trend from US $271.04 per troy ounce in 2001 to its all-time high price of around USD $1,900 per troy ounce September 2011. Thereafter, gold price remained range bound for some months and subsequently started declining steadily from 2013 to reach USD $1,060 by the end of calendar year 2015.

Trends in 2016

Calendar year 2016 started with pessimism about gold price due to indications given by US Federal Reserve Bank (US Fed hereafter) about more interest rate hikes to follow after its surprise hike BY 25 bps in December 2015.

Following the Fed rate hike of December 2015 (the first hike in seven years), and expectations of further rate hikes to follow during 2016, gold price was anticipated to remain sluggish throughout the year. In fact, it was believed that the price of all precious metals (including gold) would register a depreciating trend, since investors would move away from non-interest bearing commodities and metals.

First quarter 2016: The global economy was slowly recovering from the fear of recession, and central banks across the developed world were using stimulus to boost consumption and avoid recession. The Negative Interest Rate Policies (NIRP) implemented by central banks in Japan and Europe represent a shift to ‘unconventional policies’ which create great uncertainty. In addition, the economic transition of the Chinese economy from investment oriented to consumption oriented dampened hopes of global recovery powered by the Chinese economy. The uncertainty created by this mix of factors undermined confidence in traditional asset classes. The impact of NIRP in particular significantly reduced the demand of sovereign bonds as a stable, low-risk asset. This enabled inflow into gold backed exchange traded funds (ETFs). The central banks also started adding gold into their reserves to protect itself from global uncertainty.

Gold price during the first quarter of 2016 (Jan-March), reported an increase of 16.6 per cent, making it one of the best performing investment avenues for investors. According to the World Gold Council, the renewed appetite of investors in gold ETFs during the first quarter of 2016 was palpable. This was the best performance by gold in almost three decades and it ranked as one of the best performing assets globally during the quarter.

Brexit: The subsequent boost for the gold price was registered in mid of June when the British defied market expectations to vote for exit from the European Union causing panicky investors to flock towards traditional “safe haven” assets. Gold prices reached a three-year high amidst all the Brexit worries. It was reported that gold prices surged to US $ 1,327 per troy ounce from US $1,257 per troy ounce in one day on June 23 (after the results of the referendum came in).

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