Without a doubt, 2016 was a year of upheaval and volatility.
Among the biggest disruptors last year was the Brexit decision in late June – when despite all expectations of the contrary – the UK electorate voted to leave the European Union (EU). The move sent markets into a tailspin while pushing the pound sterling to a 31-year-low against the dollar in July.
Just as markets appeared to regain some footing, the US electorate provided the next, possibly even bigger curveball – Donald Trump’s surprise victory in the US presidential election.
Because gold is traditionally seen as a safe haven in times of economic uncertainty, many assume that the yellow metal would be a major beneficiary of risk events like Brexit. And true enough, gold hit its 2016 high in July at US$1,364, as investors and traders went in search of safe havens immediately after the election results.
Many predicted it would be a new bull market for the precious metals complex after three consecutive losing years. But gold prices saw a sharp decline after Trump’s win, as investors ditched gold amid renewed faith in the economy under the new president-elect. In December, gold price fell to its lowest level in 11 months, trading at around US$1,130. Meanwhile, the baby bull as of this writing, appears to have shrivelled and died…for now.
Why did gold prices fall?
To answer this, we first need to take a look at the fundamental factors that affect gold price.
Firstly, gold is priced in US dollars, so if the US currency goes up, investors mark down the yellow metal accordingly.
Another factor is that the dollar is rising due to the revival of the US economy, which brings the prospect of higher interest rates. This is bad news for gold, because higher rates boost income returns for other assets.
The challenge in understanding gold is that it has two faces. On one hand, it is an inflationary asset, rising as inflation expectations rise. On the other hand, it is a fear asset, rising as fear enters the market.
Throughout the first six months of 2016, it is evident that the markets were driven primarily by fear, which was why the price of gold went up. But after a certain point, fear stopped acting as a primary trend, and the price of gold stopped rising.
Will gold shine again in 2017?
At this juncture, there is speculation that gold price will drop further due to a strong dollar and interest rate hike expectations.
Analysts told Gulf News that the metal will likely trade lower than in 2016, even as the US Federal Reserve’s decision to raise interest rates in December is already behind investors’ minds.
Prices can go either way, but the general trend would likely be on the downside. The key is to keep an eye on market developments that could trigger price falls.
Besides the strength of the US economy, factors to watch out for in 2017 that can influence gold prices include demand from India and China, as well as the implementation of Brexit, when Britain starts the complex negotiations to leave the EU.
The outcome of the elections in France, Germany and the Netherlands, as well as the presidency of Trump are also key factors to key a close eye on.
However, while the strengthening dollar and the environment of higher interest rates were always going to be headwinds, they are not insurmountable if investors were looking for safety. Confidence has been running high and safe havens have not been in demand since the US election.
But we are in 2017 now and with so much political risk ahead, markets might get nervous again and gold could become a sought-after asset once more, especially given that gold price has already been corrected, unlike most asset classes.
Bank of America Merrill Lynch predicts that gold will hit US$1,200 in mid-2017. Meanwhile, UBS sees an average gold price of US$1,400 per ounce across 2017. Finally, Credit Suisse forecasts that gold will peak at US$1,500/oz in the first quarter of 2017.