SINGAPORE: In a year dominated by unexpected global events and roiling uncertainty, the movements in the gold price have defied expectations.
Following the US Federal Reserve’s decision to raise interest rates last December for the first time in nearly a decade, gold watchers had been anticipating a lacklustre 2016, with some forecasting the precious metal to fall to multi-year lows below the US$1,000 mark.
But within a week into the new year, gold prices gained more than 3 per cent to breach the US$1,100 mark as a brutal sell-off engulfed global stock markets. The surge into safe-haven assets was also fuelled by crude oil prices sliding below US$30 a barrel to 12-year lows, mounting worries about a softening Chinese economy and the Bank of Japan’s (BOJ) unprecedented move to adopt a negative interest rate policy.
Even top forecasters of the yellow metal were caught off guard by the events in January, which propelled gold prices to a strong start in 2016.
“The strong moves in the first month surprised everyone who was expecting a negative year. To be honest, I was one of them,” ABN Amro’s commodity strategist Georgette Boele told Channel NewsAsia. Rated by Bloomberg as the most accurate forecaster for gold, the Amsterdam-based analyst had initially predicted an end-2016 target of US$900 amid the likelihood of further rate hikes in the US, which would bolster the greenback.
A firmer US dollar tends to put pressure on gold prices, which is priced in the US currency and becomes more expensive to buyers located outside the US. In addition, with gold being viewed as an alternative investment to the dollar, it is usually shunned when the greenback strengthens in value.
But as worries about the global economy pulled down expectations for higher US interest rates and deflated the US dollar rally, gold prices continued to soar and eventually breached the US$1,300 level on Jun 24 as political uncertainty stemming from Brexit took a toll on already-fragile business and consumer confidence.
By Jul 8, the price of gold was at a more than two-year high of US$1,366, up nearly 30 per cent year to date.
“The dollar was under pressure with US rate hikes getting priced out, and with uncertainties like Brexit developing, everyone including me, became very bullish. With the worries surrounding the US elections, it seemed like a scenario that would be good for gold prices but the contrary happened,” Ms Boele said.
Following Donald Trump’s election victory on Nov 9, gold prices sank into a downward spiral on expectations that the President-elect’s campaign for fiscal stimulus proposals would bolster economic growth and inflation. As a result, the US equity markets U-turned after initial losses, yields on US Treasuries spiked and the US dollar strengthened, sending investors scurrying to readjust their positions into risky assets.
Mr Jonathan Chan, investment analyst at Phillip Futures in Singapore, said the gold price’s reversal came as a surprise.
"I was expecting gold prices to hold around US$1,300 after Donald Trump won because I thought the political unrest in the US would contribute to the risk-off sentiment,” the analyst said. “But as you can see from the current price action, the market had gone totally against that view.”
On Friday (Dec 30), spot gold was last seen trading at $1,160.42 an ounce, down around 9 per cent since Trump’s victory in the elections and as the US central bank indicated a faster pace of rate hikes in 2017 after rising interest rates earlier this month.
“It has been a year of two halves,” said Ms Boele. “We started the year being negative before becoming very bullish due to all the uncertainty pushing back expectations for a Fed rate hike. But now we are back to the same themes we saw last year – a stronger US dollar and more rate hikes – and the sentiment is again on the negative side.”
(Data from Bloomberg)
SOLD ON GOLD
While the roller-coaster ride in gold prices seemed hard to stomach, it has been a boon for precious metal dealers and jewellery retailers who told Channel NewsAsia that demand for physical gold usually rises amid price volatility.
Silver Bullion said sales of its gold products jumped 41 per cent this year, with the biggest increase in demand coming on the back of the EU referendum. According to the company’s founder and CEO Gregor Gregersen, sales spiked 600 per cent over the three days following Britain’s vote to leave the European Union.
The safe-haven demand also lifted sales of physical silver up by 48 per cent at the Singapore-based bullion dealer and storage provider.
“Our customers are motivated by the desire to protect themselves. There are already concerns about underlying structural problems in the West, such as the amount of debt that exists in the system. When unexpected events like Brexit happen, they create uncertainty and add to the worry, causing more people to take interest in buying physical gold and silver as a form of insurance,” said Mr Gregersen.
Over at Ho Bee Goldsmith & Jewellery, demand from local retail buyers has been consistent throughout the year, noted business manager Jessica Chia.
“People are still buying. They have seen the uptrend and are willing to invest especially with the prices coming down,” said Ms Chia, adding that seasonal buying ahead of Chinese New Year may have also contributed to the sustained interest.
Apart from physical gold bars and coins, there are other ways to invest in the yellow metal such as buying gold futures or options, stocks of gold miners, gold exchange-traded funds (ETFs) and opening gold accounts with banks.
In Singapore, United Overseas Bank (UOB) said it has seen a 30 per cent increase in the number of new openings this year for its gold-linked bank account, which does not have Goods and Services Tax (GST) and allows for transactions online.
“More than 80 per cent of our Gold Saving Account turnover volume was transacted online, increasingly by younger customers who prefer the convenience of online banking and are showing greater interest in gold-related products,” noted Ms Beh Hsia Wa, director of UOB’s Group Bullion Brokerage and Clearing.
“Given the backdrop of low-to-negative interest rates in many developed economies and global macroeconomic uncertainty in the past year, we have seen more customers turning to gold to diversify their investments and to reduce their risks,” she added.
OUTLOOK FOR 2017
Moving ahead, analysts that Channel NewsAsia spoke to are split on where gold prices are headed.
Ms Boele from ABN Amro said she has turned negative on the precious metal, with a target of US$1,100 for 2017, citing the threat of a rejuvenated US dollar.
Phillip Futures’ Mr Chan, however, believes that the rally may come back to life next year and forecasts that the price of gold will head back up to US$1,300.
“Most people would look at the US rate hike in terms of how it strengthens the US dollar but there are other factors to consider and the most important one to watch is whether Trump can carry out what he promised, how much inflation that will create and how the Fed reacts to all that,” he told Channel NewsAsia.
There are expectations that a stronger US economy will quicken inflation, which tends to stoke buying interest among investors as they believe the metal will hold its value better than other assets in times of rising consumer prices, Mr Chan explained.
Capital Economics’ commodities analyst Simona Gambarini is forecasting gold prices to reach US$1,450 by end-2017, noting that financial markets have “jumped the gun” in believing that the President-elect will be able to deliver quickly on his promise to ramp up infrastructure spending.
“The euphoria about infrastructure spending could soon be replaced by concerns about a trade war and geopolitical risks, restoring the safe-haven bid for gold. What’s more, the prospect of a big deficit-funded fiscal stimulus is likely to push inflation well above the Fed’s 2 per cent target, meaning that even if the Fed raises rates more aggressively, real interest rates should remain low.”
To be sure, analysts said they are not writing off potential surprises that could derail gold prices from expectations, yet again.
For one, elections due in France and Germany will remain high up on markets’ watch list after Italian Prime Minister Matteo Renzi lost a referendum earlier this month and as Britain navigates its exit from the EU.
The direction of policies in the world’s largest economy under Donald Trump will also be keenly eyed, said Mr Chan.
“Surprises could happen: For example, the scale of Trump's expansionary policies being smaller than expected or he goes back on his campaign on trade protectionism. These would force me to revise my forecast. Even the Fed would have to adjust its rate hike cycle,” he explained. “It's a domino effect.”
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