After being hit hard in the last quarter of 2016 with ETF outflows and funds shrinking futures length to multi-month lows, is the environment for gold turning more positive? Looks like it is.
The precious metal is up in several currencies. In US dollar terms, gold is up almost 5 per cent from the December 2016 lows, while in renminbi (Chinese) terms, it is up 4 per cent and in euros, 3 per cent.
Statements coming from Donald Trump, the US President-elect, days ahead of his official ascension suggest that protectionism may be back. Additionally, minutes of the FOMC’s December meeting illustrate concerns about a possible drag from a strong dollar.
The DXY dollar index has eased back 2 per cent from its January 3rd high of 103.82. Inflation is also coming to the fore as evidenced by a jump in European CPI figures for December and European producer prices being in positive territory for the first time since 2013, according to experts. Rising crude prices may also spur inflation. Importantly, the debate on raising the US debt ceiling will support gold prices.
US optimism
At the same time, US macroeconomic data are encouraging. The importance of non-farm payrolls is surely receding as the US labour market is nearly at full-employment levels. The focus will now shift to average earnings growth numbers, which will define the economy’s inflation expectations.
All this suggests that in the short-term, the yellow metal has an upside potential. Indeed, last week, the spot price rose to a high of $1,180 an ounce and this week it is close to $1,190/oz. A test of $1,200 an ounce seems highly likely in the coming days. But will gold be able to sustain this level? It appears unlikely. Policy announcements and economic data during the initial weeks of the Trump administration can potentially put pressure the metal.
Importantly, the demand side is a matter of concern. Prior to the US presidential election, top analysts came up with outrageous predictions for gold prices. Prices were nowhere near those fancy forecasts because most analysts ignored the demand conditions.
Demand has not been robust in recent months with imports into two of the world’s largest consuming markets — India and China — falling below expectations as a result of domestic developments, including demonetisation of high denomination currency notes in India. The upcoming Chinese New Year has of course lent some support to current prices, providing some relief to an otherwise enervated demand scenario.
Budget suspense
In India, the upcoming Union Budget, slated for February 1, is keenly awaited. There are expectations in some quarters about a reduction in the rate of customs duty, which at present is 10 per cent ad valorem. But these expectations may belied. Policymakers are categorical that gold is a demerit good and therefore not high on the Centre’s priority list.
Also, the gold trade did not acquit itself well in the aftermath of demonetisation. This is also likely to weigh in the minds of policymakers.
So, overall, the current rally may be short-lived and will peter out during the course of the month but not before testing $1,200-1,220/oz levels.
(The writer is an agri-business and commodities specialist. Views are personal. The article first appeared in The Hindu BusinessLine.)