Etikett: gold outlook

Gold outlook: flat for the year

ETF Securities Gold outlook: flat for the yearGold outlook: flat for the year

ETF Securities Gold outlook: flat for the year

Summary

Our base-case fair-value for gold is broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates.
Despite policy interest rates rising in 2017, the US Dollar has depreciated and US Treasury yields have declined. We expect these paradoxical trends to abate in 2018.

Most of the variation in gold price in our bull and bear cases (compared to our base case) comes from assumptions around investor positioning. Many measures of market volatility are currently subdued. However, several risks – both political and financial – exist. Sentiment towards gold could shift significantly depending on which of these views dominate market psyche.

Gold Price Forecast

We believe that in addition to the fully-priced-in December 2017 hike, the US central bank will follow through with three further rate hikes in 2018. That comes on top of the balance-sheet run-off that the Fed has already announced1. Although some market participants think that under a new Chair, the Fed will become more dovish, we believe the central bank will
remain data-dependent and trained staff economists’ analysis will become more influential in the Board’s decision making. In light of strengthening domestic demand and a tight labour market, the inflationary potential will be hard to ignore.

Inflation to gain momentum

Inflation has been subdued in 2017, despite so many signs of cyclical strength, but a large number of idiosyncratic factors account for this apparent weakness in price movements. Dominant wireless phone service providers changing pricing; solar eclipse changing the timing of hotel stays; severe hurricane disruptions; budget airlines opening new routes are some of the idiosyncratic factors that are unlikely to be repeated. Also the calculation of owner occupied equivalent rent has caused some distortions in the inflation numbers as it is sensitive to energy prices. With volatility in energy prices having fallen, we expect these distortions to subside. The unemployment rate is at its lowest in 16 years and a healthy number of jobs are being added every month (notwithstanding hurricane disruptions). The strength in the labour market is now likely to show up in inflation as per its traditional relationship.

We expect US inflation to rise to 2.4% in June 2018 and 2.6% by December 2018 (from 2.2% in September 2017). These levels will likely be uncomfortably high for the Fed, but given the lags in policy and price response, there is little the Fed can do next year to stop it (the inflationary pressure has been built up this year). However, we believe three rate hikes in 2018 will be required to keep inflation expectations sufficiently anchored.

CPI Inflation

US Treasury yields

During the rate tightening that has taken place in 2017, the US Treasury yield curve has flattened. While there have been 75bps of policy rate increases since December 2016, nominal 10-year Treasury yields have fallen from 2.60% to 2.34%. We don’t think that 10-year yields can continue to decline. We expect 10- year Treasury yields to rise to 3.1% by the end of 2018.

Nominal US 10yr Bond Yields

We expect the US Dollar to appreciate modestly (see FX Outlook 2018), reversing some of the weakness that we have seen in 2017. We expect the DXY (the trade weighted US dollar index) to appreciate to 102 by the end of 2018 from 94 currently. A lack of progress in implementing pro-growth policies that the Trump Administration had promised, a lack of tax and budget reform and a generally stronger Euro and Yen have weighed on the US Dollar in 2017.

Some of these trends will continue to drag on dollar performance in 2018, but rising interest rates will lend some support. We believe that the policy divergence between the Federal Reserve, European Central Bank and Bank of Japan will become more pronounced as the market becomes increasingly disappointed by the pace of tapering by the latter two central banks. That will reverse some of the strength in the Euro and Yen.

US Dollar Exchange Rate

Market sentiment

We expect CFTC futures market positioning in gold to hover around 120k contracts net long, lower than current positioning (190k), but marginally higher than the long-term average positioning of around 90k contracts net long. Currently positioning is elevated due to investor fears around continued sabre-rattling between US/Japan and North Korea and some of the tensions in the Middle East. These concerns could fall away if new developments on these geopolitical issues do not resurface. We have observed that when such geopolitical issues simmer in the background, political risk-premia tends to dissipate from the price of gold. It requires keeping the issues at the forefront of market psyche for the premia to endure.

Bull case

Our bull case for gold assumes only two rate hikes in 2018. As a result the DXY only rises to 99 and treasury yields only rise to 2.8%. We assume that inflation rises to 3%.
We raise the investor positioning in gold to 200k contracts net long for the whole forecast horizon. This is one of the main drivers of higher gold prices in this scenario compared to the base case. There are numerous risks which can push demand for gold futures higher:

• Continued sabre-rattling between US/Japan/South Korea and North Korea;
• The proxy war between Saudi Arabia and Iran escalates;
• A disorderly unwind of credit in China;
• Italian policy paralysed by the inability to form a government after the election;
• Catalonian independence pushing Spain close to civil war
• A potential second general election in Germany; and
• Market volatility measures such as the VIX (equity), MOVE (bond) spike as yield-trades unwind

In the bull case scenario, gold will rise to US$1420/oz by the middle of the year, and ease to just below US$1400/oz by the end of 2018.

Bear case

In our bear case, we assume the Fed delivers four rates hikes in 2018 as it tries to anchor inflation expectations. 10-year nominal Treasury yields rise to 3.3% by the end of the year, while the DXY appreciates to 105. By year-end inflation falls back to 1.6%. In this scenario we assume that the absence of any geopolitical risk premia or adverse financial market shock and so speculative positioning falls to 40k contracts net long. In the bear case scenario gold falls to US$1110/oz by end of 2018.

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Gold outlook 2017 further upside likely

Gold outlook 2017 further upside likely

Commodity Research Gold outlook 2017 further upside likely

Highlights

  • While the US Federal Reserve (Fed) will increase rates this year, inflation will remain stubbornly high, maintaining a low real rate environment. Gold could rise to $1300/oz (8%) in the first half of the year, aided by a weaker US Dollar (USD). However, USD strengthening in the second half of the year and subdued enthusiasm for the metal in the futures market could drive a sell-off, with gold ending the year at US$1230/oz.
  • While the US Federal Reserve (Fed) will increase rates this year, inflation will remain stubbornly high, maintaining a low real rate environment. Gold prices could rise 8% in the first half of the year, aided by a weaker US Dollar (USD). However, USD strengthening in the second half of the year and subdued enthusiasm for the metal in the futures market could drive a sell-off, with gold ending the year at US$1230/oz, just 2.5% higher than today.
  • In a bullish scenario for gold, the Fed will be slow to act and inflation will be markedly above market expectations, while the USD weakens. Gold would end the year at US$1380/oz (15%).
    In a bearish scenario for gold, the Fed will move more aggressively, seeing the USD appreciate and burst the bond market bubble. Gold would end the year at US$1095/oz (-9%).

2017 gold price forecast

Gold has had a strong start to the year with the metal having risen 3.6% so far. We expect gold to end the year at US$1230/oz, up from US$1185/oz (2.5%). However, gold could peak at a higher level, at around US$1300/oz mid-year (+8%). Our projections on gold are based on the model we presented in “Policy mistakes provide upside potential for gold”. We also present a more bullish and bearish scenario in addition to our base case.

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Inflation to surprise on the upside

US inflation is rising rapidly. Higher energy prices today compared with a year ago will likely see inflation rise substantially above the Federal Reserve’s target of 2%. Aside from the volatile energy component, core prices are likely to rise as the US labour market shows signs of tightness. The unemployment rate at 4.7% is close to the ‘natural rate’, indicating that any further improvement will be highly inflationary. We believe that headline inflation will reach 2.9% in the first half of the year as a result of higher energy prices compared to a year ago, but even as the base effect fades, inflation will remain elevated at 2.7% in the second half. Inflation will rise despite the Fed delivering on all three rate hikes implied in its ‘dot plots’. Inflation will be substantially higher than the Fed’s projection of 1.9% and the consensus view of 2.5%.

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Dollar appreciation to follow depreciation

As discussed in “Near-term downside for US Dollar”, we expect the USD to depreciate in the near-term after the currency has risen too far, too fast. The risk of the Fed’s actions not living up to its rhetoric is likely to place downward pressure on the currency. USD could fall as much as 2% from today’s levels in the first half of the year. As the Fed comes to terms with having to be more active with monetary policy in mid-2017, we feel that the USD could stage a rebound. The USD is likely to end the year 3% higher than today.

Nominal bond yields rise

Nominal bond yields are expected to rise as the Fed raises policy interest rates. We expect the Fed to deliver all three of the rate hikes indicated in its ‘dot plot’. Although policy rates will increase by 0.75%, we believe that nominal US 10-year bond yields will increase by 0.5% by year-end (from 2.5% to 3.0%) as we typically see the yield curve flatten in rate rising environments.

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With inflation remaining elevated, despite the increase in nominal yields, real yields will be low and could even decline from just under 0.5% currently. Given gold’s historic negative relationship with real rates, a rising nominal rate environment is still consistent with rising gold prices.

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Positioning less sensitive to shocks

Market sentiment toward gold has become subdued. Speculative positioning in gold futures has fallen drastically from last year. In July 2016 speculative positioning in gold futures reached an all-time high of 347,445 net long contracts as the shock result of Brexit led market participants toward the haven asset. But other shocks failed to muster as much enthusiasm for the metal. The surprise win for President Trump or the rejection of constitutional reform in Italy for example had little lasting support for the metal in terms of price or positioning. Speculative positioning fell below 100,000 contracts by the end of the year. It appears that the market has become desensitised by shock events. We think there could be a small uptick in positioning due to the French Dutch and German elections this year, but not to the levels we saw last year. There is also the risk that market uncertainty around Trump’s policies drives more investment in gold futures. We expect positioning to rise to 120,000 (which is markedly lower than the average of 220,000 last year).

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Bull case

In a scenario where the Fed only increases rates twice this year while inflation rises to 3.2%, the USD could lose further ground, depreciating by 1%. More marked curve flattening could see nominal rates only rise to 2.7%. If markets become more responsive to shocks, speculative positions could move higher to 200,000 (close to the average positioning for last year). Under this scenario gold could rise to US$1380/oz by year end.

Bear case

In a scenario where the Fed tries to get ahead of the curve and reduce the risk higher inflation becoming entrenched into expectations, the central bank could raise rates four times this year. Most of the impact on inflation will only be felt in 2018, with inflation at the end of 2017 still around 2.4%. However, the USD may appreciate 5% while bond yields rise to 3.3%, a scenario consistent with the end of the bond market bubble. With markets more focused on a tightening monetary environment rather than political stress points, speculative positioning in gold could fall to 40,000 (significantly below the long term average of 88,000 net long contracts). Our model indicates that gold would fall to US$1095/oz in such a scenario by year end.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

The analyses in the above tables are purely for information purposes. They do not reflect the performance of any ETF Securities’ products . The futures and roll returns are not necessarily investable.

General

This communication has been provided by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

This communication is only targeted at qualified or professional investors.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.