Making Gold Demand, Price Predictions for 2017

The World Gold Council and Thomson Reuters both weigh in on what they expect in the market for the yellow metal this year.

Brecken Branstrator brecken.branstrator@nationaljeweler.com

London--While 2016 had its ups and downs, the year proved to be a good one for gold.

The metal’s price grew about 10 percent during the year, according to the World Gold Council, noting that it averaged $1,250.80 per ounce in 2016. It also has gained more than 5 percent since the Federal Reserve increased interest rates in mid-December.

For 2017, Thomson Reuters is forecasting an average price of $1,259 per ounce for gold, which would be a slight increase over the 2016 average that the WGC reported.

The strength of the U.S. dollar likely will remain a headwind to further price increases, at least in the first half of 2017, according to Ross Strachan of Thomson Reuters. Additionally, there aren’t many indications that Asian demand, which declined substantially last year, will pick up again just yet.

However, as the year progresses, there is a likelihood of flows of capital into safe-haven investments, possibly spurred by election results in some European countries and the increasing chances of another country leaving the European Union, he said. This will push up the price of gold.

While it doesn’t make price predictions, the WGC did say it believes that gold demand will remain high in 2017, noting a number of factors that will come into play this year.

According to the WGC, there are six major trends that will support demand for the metal this year.

1. Heightened political and geopolitical risks. There’s a lot of uncertainty in global politics right now--key elections will be held this year in the Netherlands, France and Germany, and the U.K. has to negotiate its exit from the European Union.

In the United States, there are some positive expectations about President Donald J. Trump’s economic proposals but there also are some concerns, especially in regards to trade between countries and “geopolitical tensions triggered by the new administration,” the WGC said.

Gold proves to be a strong investment during times of systemic crisis, the council said, adding that it expects gold investment demand to remain firm in 2017.

2. Currency depreciation. It’s likely that monetary policy will split between the U.S. and other parts of the world this year,with the Federal Reserve expected to tighten its policy while uncertainty looms with what other central banks will do. The divergence is likely to lead to fears of currency deprecation.

Since gold has outperformed all major currencies as a means

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of exchange for the past century--the available supply rarely changes and is pretty dependable--this is likely to drive gold investment demand as investors look to preserve capital. Central banks also will continue to acquire gold to diversify their reserves.

3. Rising inflation expectations. Nominal interest rates (interest rates before inflation) in the U.S. are expected to increase this year but so is inflation, which could support gold demand for three reasons.

First, gold historically is seen as a valuable investment to hedge against inflation and decreased value of currency. Secondly, higher inflation will keep real interest rates low and keep gold more attractive. The final reason is because inflation makes bonds and other fixed income assets less appealing to long-term investors and, as such, more will turn to investments such as gold.

4. Inflated stock market valuations. Stock markets rebounded significantly during the last part of 2016 and stocks in the U.S. are reaching historic highs.

Generally, investors have used bonds to protect their capital from stock market correction as stock valuations increase but this becomes less of an option as rates rise and the risk of correction becomes even greater. In a time of such great systemic risks, gold’s role as a portfolio diversifier becomes especially relevant.

5. Long-term Asian growth. Gold demand is so closely related to increasing wealth in Asian economies; demand for gold has increased as countries have become richer. The WGC said that macroeconomic trend in Asia will support continued economic growth through the next few years, driving gold demand.

While changing consumer tastes have affected jewelry demand in the Chinese market, its investment market continues to boom. In India, the demonization program is expected to have a negative effect on economic growth and gold demand in the short-term, but “the transition to transparency and formalization of the economy will lead to stronger Indian growth in the longer term, thus benefitting gold,” the WGC said.

6. Opening of new markets. Gold has become more mainstream and accessible to more investors and this trend is expected to continue in 2017.

For example, at the end of last year, the Accounting and Auditing Organisation of Islamic Financial Institutions worked with the WGC to launch the Shari’ah Standard for Gold, opening up the Muslim world to gold investment, a move that one fund manager at an investment firm called a “game changer.”

Brecken Branstratoris the senior editor, gemstones at National Jeweler, covering sourcing, pricing and other developments in the colored stone sector.