Gold News

Expect the Expected in 2017. For the Rest, Buy Gold

You can't plan for the unplannable. Buying gold might at least spread your risk...
 
LIKE quitting smoking again (now something of a pro') and pretending to drink a bit less (at least mid-week) a rally in prices to buy gold is becoming something of a New Year's tradition, writes Adrian Ash at BullionVault.
 
Eight times in the last 10 years gold prices have ended January higher than they started versus the US Dollar.
 
That contrasts with a strike rate of below 50% over the previous four decades.
Chart of average monthly change in gold prices, 1968-2016 (US Dollar price). Source: BullionVault
So far, so much to script then for 2017.
 
But will that keep the underlying trend pointing higher for precious metals after 2016 ended the 5-year slump from gold and silver's record highs of 2011...? 
 
Prices to buy gold bullion ended December 2016 higher for the year against pretty much every currency, defying the chorus of bearish forecasts and punditry which hit the web this time 12 months ago. 
 
Priced in US Dollars – which grew more almighty than any time since 2002 after Donald Trump's victory for the White House – gold gained 9.1% in 2016 overall. 
 
On the annual average, gold gained 7.6%, meaning that the leading analysts were out by nearly $150 per ounce on average – forecasting $1103 instead of the $1248 achieved – and undershooting the outcome by 12%.
 
Even the closest forecaster was 2% shy, with Swiss bank UBS's Joni Teves predicting a full-year average of $1225. 
 
Winner of the London Bullion Market Association's 2016 gold competition, Teves now forecasts a 2017 average of $1350 per ounce. But take note. The 2015 winner, Bernard Dahdah of French bank Natixis, said gold would average just $970 last year, repeating the same drop in prices which he had (correctly) forecast a year before. 
 
Even the best forecasters, in short, tend to expect what they have just seen to be repeated. Teves broke that pattern last year, standing way apart from the pack with her bullish call. But alongside all the reasons to think gold and silver may rise again, precious metals do face some challenges. 
 
First up in 2017 comes the continued "Trump bump" for the Dollar, US rates, and the New York stock market. Because with the greenback, Treasury bonds and equities offering bigger returns, who needs boring old gold? Certainly not the Republican hedge fund managers formerly betting big on bullion. 
 
The largest gold ETF, the GLD trust fund, has proved immune to late-December and the New Year's rally in prices. Betting on Comex gold futures also retreated yet again last week, slumping 80% and more below last July's new all-time record bullishness amid the shock of the UK's Brexit referendum. 
 
If you're looking for price support, on the other hand, India's consumer demand has sunk amid the government's shock demonestisation of the country's largest banknotes. That has sunk gold imports to the world's No.2 private buyer down to the lowest since 2003, keeping local prices at a discount to global bullion quotes as jewellers refuse to re-stock, forecasting a dire year ahead amid fresh crackdowns on 'black money' tax evasion. 
 
No.1 consumer nation China meantime faces growing controls by Beijing, finally spooked by the outflow of money needed to pay for buying gold imports ahead of this month's key Chinese New Year shopping spree. 
 
Inflows via Hong Kong fell to a 10-month low in November, helping spur the strong premium for gold landed in Shanghai now offered by what remains solid local demand. 
 
Word is that metal is finding its way into the 'free trade zone' of the city's airport, awaiting clearance to enter the country and being heavily traded on the international section of the Shanghai Gold Exchange. 
 
But China remains a Communist one-party state, and if Beijing wants people to buy less gold, they might struggle to buy more, at least for a while. 
 
Against these drags and barriers, precious metals prices of course look likely to rise if other asset prices turn south. 2017 brings a calendar packed with risk events.
 
Donald Trump moves into the White House on 20 January of course, with his first budget due sometime in early February. If this week's press conference proves any guide ( scandals aside), it will be heavy on politics, light on policy details, and basically attack some sectors' profit margins directly.
 
The US debt ceiling is then set to be reached in March, risking a federal government shutdown or even a repeat of summer 2011's rating-agency downgrades of US debt if the President and Congress can't agree to borrow the money they must to keep the lights on. 
 
March also brings the Netherlands' election for prime minister, with anti-Euro Geert Wilders (now convicted only of inciting "discrimination", not hatred) well in the lead, plus the UK Government's self-appointed deadline for triggering Article 50 of the EU's Lisbon Treaty, firing the starting gun on 2 years of rancour, wrangling and fudge between Westminster and Brussels, never mind between Remainers and Leavers at home. 
 
Then we'll get the French presidential election in May, with the global media likely to scream about the odds of the National Front's Marine Le Pen winning, with Italy set to need a new leader by then, if not sooner, spooking its banking sector still further, and Germany voting for or against Angela Merkel in early autumn. 
 
Between now and then, our old friend the Greek debt crisis will return as well. But as with Trump's victory in November, the impact on financial markets can't be taken for granted. Because where Athens' misery helped spur the peak in precious metals of 2010-2012, it failed to stem the drop when other assets recovered worldwide – and gold sank with silver – in 2013.
 
All told then (and terrorism or war notwithstanding), we know when the shocks might come. But that means they cannot really be shocks, especially after the scheduled risks of 2016 delivered what became all-too obvious once the initial shock wore off.
 
Besides, no one can say which way any such shock might run in the financial markets anyway. A surge in prices and demand to buy gold, after all, was the only sure-thing ahead of Donald Trump getting elected in November. The metal rose for all of 10 hours before sinking towards 11-month lows.
 
Expect the expected, in short. Because as the herding of analysts and pundits all proves, the human mind cannot expect what it cannot. 
 
For all that, there's gold...and the hope that, if all else fails, it continues to offer financial insurance. 
 
No, gold isn't guaranteed to rise in price if equities or real estate fall. But it is pretty certain to remain chemically inert, doing nothing and asking nothing beyond acting as a store of value throughout history and across all civilizations. Which all-too often has come to matter when history or civilization faces a serious turn for the worst. It has counted time and again when disaster merely took the form of a drop in financial assets too.
 
Spreading risk with a little gold has reduced the worst losses without costing too much in overall annualized returns across the last 40 years. For UK investors across the last 20 years, it has in fact boosted headline returns on our analysis of gold's diversification value to a portfolio.
 
Just a thought as 2017 gets into its stride.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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