2017: Another Tough Year for Gold?

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Metals

Gold and uncertainty are friends.

The two go hand in hand. The world’s favorite precious metal is a fear and inflation hedge.

So when fear and uncertainty are high, gold does well.

That said, in the current market, gold has a difficult hill to climb. It pays no dividend or interest and has no balance sheets to look at. With “doom and gloom” in recession, there’s little to spark gold’s momentum.

But if we look back to 2016, we see a perfect example of how the gold markets move… and how quickly sentiment can change.

Because gold – and gold investors – need a catalyst.

Now, last year was an election year.

And that always triggers anxiety.

In 2016, gold demand inched 2% higher to a three-year high of 4,309 metric tons. That wasn’t too exciting. But within those numbers we saw two very different trends at play.

For example, inflows into ETFs were the second-highest on record. The 532 metric tons scooped up by ETFs were second only to the 646 metric tons that flowed into ETFs during the financial recovery in 2009.

But we can see the effect anxiety has on the price of gold.

During the first three quarters of 2016, ETFs gobbled up gold… From January to July 6, gold’s price shot up 31.5% as Brexit fueled uncertainty. By September, gold prices had slipped, though they were still up 23.9% for the year.

And then, in the final quarter of the year, there was a drastic shift…

The price of gold dropped 13.4% over the following three months.

A lot of that had to do with the U.S. election and the probability of the Federal Reserve raising rates. ETFs did a dramatic about-face and saw outflows of 193 metric tons.

When all was said and done, gold ended 2016 up 9%.

The precious metal had positive gains, but ended at a third of what it was at its peak.

Sentiment shifted gears three times last year… including twice overnight – due to Brexit and the U.S. election.

It was a wild ride for an investment considered to be a safe haven.

And once you took out the emotional roller coaster, the fundamentals of gold weren’t much to write home about.

Last year, gold suffered two black eyes. The first was jewelry demand, which fell to a seven-year low because of weakness in India and China. Then central bank demand tumbled to its lowest level since 2010, cratering 33%.

So gold has struggled through trials and tribulations over the past year. And because anxiety started ramping up in early 2016 – after one of the worst Januarys in market history – year-over-year comparisons today are tough.

For example, in February of this year, sales of gold coins from the U.S. Mint dropped to their lowest levels in 14 months. Plus, compared to February 2016, sales were down 67%.

To the precious metal’s credit, since the start of the year, gold has found its footing and pushed 8% higher. Once again, that’s a pretty solid gain considering that the Fed is expected to raise rates three times this year… And the first could be this month.

Truth is, I don’t foresee gold skyrocketing in 2017. The mood isn’t right for that kind of move… at least not right now.

The markets have roared to record highs since November and the results of the election.

And psychological thresholds – those big round numbers like 20,000 and 21,000 – have been torn through.

But 2016 was a perfect example of how quickly sentiment can change. As I mentioned, we had two moments last year where sentiment did an about-face overnight. That said, I expect gold to move higher. As you know, the dollar and the price of gold typically have an inverse relationship. When the dollar is high, gold is low and vice versa. Gold will go higher because there’s a limit to how strong the dollar can get…

And how strong the administration wants the dollar to get.

We’ve been in a risk-on environment since November. Almost everything has surged in a very short period. It’s times like these that behoove us to look at alternative assets outside of stocks to add to our portfolios.

When optimism is high, it’s the perfect time to add protection from a possible downdraft.

Good investing,

Matthew