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Gold as a Trump hedge – is that a good idea?

The outflows from precious metals funds, that can predominantly be traced to gold ETFs, at the end of 2016 once again showed to what extent price developments drive investor appetite for the asset class.

As the gold price recorded its steepest monthly loss in three years in November, Morningstar recorded net redemptions of €1.13bn from precious metals funds the following month. These were the largest monthly outflows since December 2013.

Exactly the opposite happened from February to September last year, when a combined €11.23bn flowed into precious metals products as the gold price rose by some 13% over the period.

Considering the gold price rose by some 6% in the first three trading weeks of the new year, net inflows are likely to have resumed with it. But is there any reason to believe the gold price recovery will be sustained? Analysts polled by the London Bullion Market Association (LBMA) forecast an average gold price of $1,244 per ounce for 2017, just about 2.5% higher than today’s price.

As analysts tend to be a little biased towards optimism in their forecasts, the conclusion should be uncertainty about the gold price is high. And that just reflects the wider confusion that’s gripping investors, with benign economic data in Europe being offset by the dark shadows cast by the early actions of the Trump administration in the US.

Dollar strength

“The macroeconomic risks have increased and our view is that central bank rates will remain benign for gold,” Joni Teves, a commodities analyst at UBS in London, said at a debate organised by LBMA in London earlier this week. “If growth in the US accelerates, that will hurt gold significantly, but we haven’t seen any evidence to that so far. We also believe that the dollar is already expensive against other DM currencies.”

There is indeed reason to believe that’s the case, considering the recent efforts from several senior figures in Trump’s administration, including the President himself, to talk down the dollar.  

Monetary tightening

But Bernard Dahdah, a commodities analyst at Natixis, believes that central bank policy will continue to be the dominant factor impacting the gold price this year. And that means the yellow metal will face downward pressure. “During the first half of last year, gold was driven up by QE in Japan and Europe, while it was driven down by the Fed rate hike in the second half of the year,” he said at the same debate.

 

Part of the Bonhill Group.