Gold May Continue To Shine In 2017

Year 2016 has been a tough year for investors across the asset classes, including bullion. Equity markets may have been the bête noire for a few who had pegged lot of growth expectation to the Indian corporate earnings. As was expected, investing in Sensex did not prove profitable in 2016.

Gold, however, retained its lustre till the very end of the year until demonetisation and the uncertainty created by such an aggressive economic policy decision started affecting the bullion price. Gold was up by 21 per cent from January 1 to November 8 from Rs.24.980 to Rs.30,330 per 10g. However, it lost almost 10 per cent in value over the past 45 days.

A look at gold funds suggest average return of 8.87 per cent on a YTD basis. The positive returns for gold as an asset class is seen after almost three calendar years. The global uncertainty and heightened volatility has led to an increased demand for gold. Brexit was certainly one of the events that triggered uncertainty in global financial markets.

However, in the last two-odd months, with improving data on the US economy and Trump victory further fuelling the growth revival story in the US economy, there has been flight of capital from emerging markets to the US markets, which has led to USD strengthening. A strengthening USD clubbed with innovative Trump policies expected to put the US economy in growth trajectory does not augur well for gold as an asset class.

What is interesting to note is that even in uncertain outcomes like Trump presidency and Italian referendum, gold prices have fallen which is against the norm. The reason for such behaviour can be attributed to sharp increase on bond yields post Trump electoral victory. With the Trump win, the financial markets have started factoring in a steady economic growth which will lead to rising interest rates in the US economy. The whole development prompts strengthening of the US dollar which may be a positive for the US equities, but it has ensured that gold prices stay under pressure and the disappointing aspect for gold investors could be that this phenomenon may continue for a while.

DEMONETISATION AND GOLD PRICES 

Locally, in India, one of the major events that took investors across the board by surprise was demonetisation. The prices of all asset classes crashed, including gold. Going ahead what could be the impact of demonetisation on gold prices is a million-dollar question. Chances are that the asset prices may remain subdued as is expected even for the financial assets

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CONCLUSION 

The year 2016 has been a year for commodities. Several key commodities have delivered positive returns after several years of negative returns. Key commodities like zinc managed to deliver 69 per cent return in dollar terms. Crude oil , lead , copper and aluminium all posted double digit returns. Silver outperformed gold by delivering almost 20 per cent if we consider the YTD data running up to November 30.

In general, the year 2016 was great for commodities and gold merely participated in the broader commodities rally during the year.

Come 2017, things do not look rosy for commodity prices. The uncertainty in global economy is expected to increase in 2017. Even though one can expect less surprises in coming year as compared to the year 2016, which was undoubtedly one of the most adventurous years in recent times, 2017 promises to be a year of uncertain outcomes.

Gold as an asset class may attempt to outperform other asset classes, including equities, real estate and fixed income in coming year owing to several factors. Investors need to keep a close eye on the economic growth in China and the US and how the money flow works in the first half of 2017. It is widely speculated that the flight of capital will be towards developed markets, at least in the first half of the year. 

This would give us enough indication that the prices of gold may remain subdued in the first half of the coming year, assuming the emerging markets face continued redemption pressure from the developed markets.

However keeping an eye on increasing uncertainty and volatility on financial markets globally, gold remains one of the best ways to protect wealth. We believe investors may be headed for yet another positive year for gold in 2017, although expecting higher double digit returns may be too much to expect from the bullion.

Positive return for gold as an asset class is seen after almost three calendar years. The global uncertainty and heightened volatility has led to an increased demand for gold. Brexit was certainly one of the events that triggered uncertainty in global financial markets.

"The act of demonetising high value currency notes by the Government of India is a decisive and welcome step to curb tax evasion and improve compliance, an important milestone in the journey towards the vision of becoming a cashless economy. This will be transformative for gold as this has the potential to squeeze out the unofficial trade and drive greater transparency across the spectrum, enabling gold to be a part of the mainstream channels"

CHIRAG MEHTA, QUANTUM AMC

How do you see the developments in the US markets affecting the gold prices in coming year(s)?

The US inflation expectations have been inching higher this year. Part of the increase in bond yields was likely on account of increasing inflation expectations which would compel the Fed to increase rates. However, since Trump's becoming president-elect, the rate of increase in nominal interest rates has exceeded the rate of increase in inflation expectations. This led to a scenario of higher real rates. In effect, over the past month, economic growth expectations have risen faster than inflation expectations. As discussed above, in reality, Trump's proposed plan can actually quicken the pace of price inflation than what he can deliver on economic growth. This would eventually lead to a domino effect of rising inflation expectations and lowering of real interest rates. As real interest rates start to decline, the strength of the dollar would reverse and also make the lower end of the yield curve fall faster in anticipation of lower rate hikes. This will be extremely bullish for gold.

In the short run, what risks and headwinds do you see for gold prices? 

The current reflationary exuberance may persist into the first few weeks or may be months of Trump's presidency. This would make real yields rise further. In which case, the dollar will stay firm and gold will remain under pressure. However, we do not expect big downsides in gold as much of it is now factored into prices and rising yields will start showing negative effects on other aspects of the economy and asset markets as well. The prospects of a hike in interest rates have been rising faster than inflation expectations, which is bad for gold in the short term, but we doubt this will continue for long. With the increase in commodity and energy prices, the labour market tightening and a hawkish trade policy could soon manifest into rapidly rising inflation expectations. The potential headwind for gold could arise from the proposed Trump tax plan of providing a one-time tax cut to incentivize repatriation of corporate money stashed abroad. This repatriation would lead to a large one-off boost to the US Treasury's revenues. However, history suggests that would just postpone the inevitable. There exist more uncertainties than certainties in the global macroeconomic environment of which Trump's presidency is a big unknown. We believe that barring the near term, gold prices should start moving gradually upwards in 2017.

MANAV CHOPRA, HEAD TECHNICAL ANALYST, MONARCH NETWORTH CAPITAL

GOLDMONTHLY - Gold after a long-term trend reversal from its Falling Wedge pattern has observed a decline from its recent peak 1350 levels. The recent decent looks corrective in nature and has recently tested the support line of the pattern. This is usually an entry point for the bulls since and the gold could witness some bottom formation at the current levels. There are multiple support at the lower time frame charts around the 1150-1120 levels which would provide cushion incase of decline and should be bought for an upside Targets of 1250-1300 levels.

GOLDWEEKLY - The Weekly charts shows the rally from November'15 lows to August'16 highs which has been retraced by over 78.6%. The recent low formed a Bullish Morning Star pattern which indicates a short term bottom in place. The Stochastic oscillator has given a bullish crossover from the oversold level which further confirms a bullish setups and a possible rally in the near term. In previous instances a bullish crossover from the oversold levels in stochastic has resulted into an average rally of over 5-6% within 2 weeks.

SILVERMONTHLY - Silver after a longterm decline exceeded the long term falling trend line which confirmed a trend reversal as the counter also managed to see a healthy follow on move post the breakout. Recently after 5 months of decent the prices have recently tested its horizontal support line which indicates a possible bounce from the current levels. The RSI had also exceeded the 2012 high which hinted for a range shift in Silver chart and the current decline is good opportunity for a reentry for Bulls for an upside Target of 19 & 20

SILVERWEEKLY - The Weekly chart show the recent decent is in a falling channel pattern and is nearing the support clusters of 15.5-15 levels where the prices are likely to reverse. The RSI has tested the Bullish support range along with positive divergence in the stochastic ossiclator which indicates a likely trend reversal in the near term.