In Depth

Gold price waits for rates clues from Jackson Hole

Political turmoil in the US has the potential to 'help gold in the short and longer term'

Societe Generale downgrades gold price forecast

30 Janaury

Societe Generale has become the latest analyst to cut its gold price forecast, revising its prediction for the first three months of the year down from $1,275 to $1,175 an ounce.

 

That not only means the French investment bank no longer sees a strong rally to come for the metal, but in order for gold's average price to hit $15 less than its current $1,190, it is now predicting a sharp fall.

 

Added to that, Societe Generale expects this downturn to continue, forecasting an average of $1,150 an ounce for the year as a whole, down from $1,300.

 

The move follows last week's revision from the World Bank, which changed its 2017 average gold price forecast to $1,150 an ounce, down seven per cent from the 2016 average of $1,247.

 

"Analysts have sharply scaled back expectations for [the gold price] this year after the metal's weak fourth-quarter performance, with the prospect of further US interest rate hikes and a bumper year for stocks weighing on interest," says Reuters [1].

 

Following the election of Donald Trump as US president last November, gold slipped from a peak of $1,337 an ounce to close to $1,100 as investors eyed the prospect of a splurge in infrastructure spending boosting growth and inflation.

 

A surge in price rises could be followed by interest rate hikes over and above the three increases set out by the Federal Reserve in December, a move already considered hawkish.

 

Gold tends to fall when rates are rising as it does not offer an income and so its opportunity cost rises relative to some other assets.

 

For now, the gold price is holding firm at around $1,190 an ounce following a modest rebound this morning on the back of its first weekly loss for 2017, of around two per cent.

 

This morning's mini-rally has been prompted by a fall in the dollar, reflecting a hit to investor confidence amid the furore over Trump's travel ban, which could affect US residents and workers.

 

In turn, this emphasises the one bullish case for the gold price this year - that President Trump will engage in a range of self-defeating policies which will boost appetite for safe haven assets such as gold.

 

World Bank predicts gold price will average $1,150 in 2017

27 January

The World Bank has added its name to the list of bearish forecasters for the gold price this year, predicting trading will average $1,150 an ounce.

Spot gold has been hovering around $1,200 of late, suggesting the price will need to go significantly below this to reach the lender's forecast.

This would be a seven per cent fall from last year, with the bank putting this down to a stronger US dollar and rising rates, both of which are being widely predicted by analysts, says Mining.com.

US interest rates are already projected to increase as the economy improves, with the Federal Reserve setting out three hikes at its last meeting in December.

Adding to this hawkish sentiment is the election of Donald Trump, with his planned splurge on infrastructure and tax cuts expected to spur economic growth and inflation, which is typically controlled via interest rates.

Gold tends to fall when rates are rising because it does not offer an income and so loses ground to other, yielding assets.

Last year, it averaged $1,247 an ounce, after rising throughout most of the year to peak at $1,337 on the evening of Trump's shock election victory. It subsequently fell sharply.

Prices have also been on the wane of late, following a strong start to the year, and this morning were at $1,183 an ounce, well down on the $1,219 reached earlier this week.

Reuters says this was due to the dollar continuing its rebound, amid another bout of strong economic data.

Gold tumbles below $1,200 as Dow Jones hits all-time high

24 January

The gold price has ended its multi-session residence in a narrow range above $1,200 an ounce, as confidence in the effects of Donald Trump's presidency returns to the markets.

Earlier today spot gold slumped to a low of $1,185, before recovering only slightly to $1,189 by mid-afternoon.

Gold's reversal comes the day after US stocks surged to a new all-time high, with the benchmark Dow Jones Industrial Average leaping above 20,000 for the first time.

The boost was driven by a new optimism about Trump's impact on the US economy, after the newly-elected president signed a string of executive orders to enact pledges made during his election campaign.

"People are seeing that the administration is carrying through with some of the things they promised," John Stadtler, head of US financial services at PwC, told CNBC.

"There's no question that some of the executive orders he's signed are good, especially deregulations," added Peter Cardillo, chief market economist at First Standard Financial.

Beyond these executive orders, which include controversial policies to build a wall on the Mexican border and restrict migration from Muslim countries, the decisive start for Trump has broader implications.

In particular, he has promised a massive $1trn infrastructure spending splurge that could spur growth and inflation.

Alongside the increases for stocks, both the dollar and US Treasury bond yields have been bolstered today – and this is negative for gold, says Reuters.

A rising dollar is bad because gold is held as a hedge against the US currency. It is also denominated in the currency so its cost is increasing for overseas buyers.

Yields on US debt move inverse to prices, meaning that "bonds are cheaper for investors who want an alternative to gold".

Gold price hits two-month high - but runs out of steam again

24 January 

The gold price jumped to another 2017 high last night and rose to its highest level since late November as worries over Donald Trump's protectionist policy agenda took hold.

However, once again gains were pared, this time by the dollar rebounding from overnight lows, which saw prices drop to $1,211 this morning.

Spot gold touched $1,219 an ounce at one point last night, its highest since 22 November. That's an advance of one per cent from Friday's low and equates to a six per cent jump for January as a whole.

However, it is also around $120 an ounce below a peak on US election night on 8 November, says Mining.com.

That reflects much lower confidence in gold's chances in the months ahead following Trump's rise to the presidency.

Yesterday's surge came as the new US President signed an executive order cancelling the Trans-Pacific Partnership (TPP) trade pact, which has added to fears he will preside over an era of protectionism.

While traders appear less convinced Trump will succeed in driving economic growth and inflation much higher, there are also still expectations of several rate hikes this year.

Gold tends to fall when rates are rising, as it does not offer an income yield and so loses out to assets that do.

Reuters' Wang Tao says the fact that "exhausted" gold failed to break its constraints could see it fall back again, perhaps to below $1,200. 

However, others argue the current conditions could yet prompt a stronger rally. 

INTL FCStone analyst Edward Meir said: "We suspect that gold will likely push higher, as… unease about Trump's policies, growing perceptions that the Fed will be relatively quiet for a while and pressure on the dollar, all provide an element of support". 

Gold price up as 'Trump trade unwinding resumes'

23 January

The gold price continued to rise in overnight Asian trading on the back of a rebound on Friday, the day Donald Trump was inaugurated as US President.

Spot gold, which fell below $1,200 on Thursday, hit a high of $1,215 an ounce at one point, although gains pared slightly in early London trading.

Prices tumbled late last year after Trump's surprise election victory, as investors focused on his spending and tax cuts promises, which could boost the economy and send inflation spiralling higher.

 

But Daily FX says traders have resumed "Trump trade unwinding", turning their attention now to the potential for staunchly protectionist trade policies that would hit the US dollar, to which gold is inversely correlated.

 

Conversely, as it does not pay a yield, the metal tends to fall when interest rates rise. Consequently expectations of rising inflation, which is typically controlled by rates, are seen as bearish.

 

All of which means prices are pulled higher or lower depending on how investors feel Trump's policy agenda will play out.

 

Following an inaugural address that "pledged to end the 'American carnage' of social and economic woes" and was seen as "a populist and nationalist rallying cry", says Reuters, it's the protectionist fears which are taking centre stage.

 

Significantly, though, despite the latest bout of buying, traders "failed to follow through" the rally and gold has run aground in roughly the same place as the upsurge last week.

 

This suggest that gold's gains are still being limited by expectations that interest rates will increase several times this year, as set out by the Federal Reserve in December.

 

Philadelphia Fed president Patrick Harker repeated on Friday that he expected three rate increases if the employment market improves further and inflation moves to the bank's two per cent goal, says Reuters.

 

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