The path won’t be straight, but gold’s bullish trajectory is set

Feb 6, 2017   By     RACHELKONING BEALS

Gold could have at least another 5% upside this year from the 5% leap it already notched in January, driven by higher inflation expectations and the safe-haven demand seen amid swirling uncertainty for the Trump administration’s growth proclamations and its foreign diplomacy.

Forecast contributors to the London Bullion Market Association survey predict the price of gold will average $1,244 an ounce in 2017, 5.3% higher than the first half of January 2017, but broadly in line with the actual average price in 2016, according to the LBMA 2017 outlook. Analysts in the survey are predicting gold will trade in an average range of $1,101-$1,379 this year.

Bigger picture? This year is simply one step on the bullish path for the precious metal as an inflation sleeping giant wakes, according to several analysts. Gold, whose physical underpinning differentiates it from inflation-vulnerable currencies, rose roughly 9% in 2016 and ended the year near $1,150 an ounce. Outside its use as an inflation hedge, gold can also simply be seen as a hiding place away from riskier markets, including stocks. And, yes, say analysts, both factors can drive gold at the same time.

“I think I’ve seen estimates out of China that over 375 million Chinese want to buy gold but can’t right now. Also, I’ve seen selling of gold to the European Union client base and storing here in America,” said Peter Thomas, senior vice president of precious metals with Zaner. “So, the global ‘nervous’ client coupled with all the hot-spot flare ups in the Ukraine, Poland and the Middle East have been fueling this demand side of the equation. Add to the mix the hydra-head of inflation and, yes, we have a very strong opportunity for higher prices and definitely both have been working together to push gold higher.”

Among the LBMA list, the biggest bull is Joni Teves, precious metals analyst at UBS, who pegs the average price for 2017 at $1,350. The other side of the spectrum belongs to Bernard Dahdah, metals analyst at Natixis, who tags the average price at $1,110.

London Bullion Market Association

LBMA member estimates for gold’s price in 2017

Teves had been even more bullish a few short months ago. In a late-December report, UBS said the bank’s higher gold-price expectation had been tapered to reflect moves across a range of markets after U.S. elections, because expectations grew that fiscal stimulus would boost economic growth and yields, cutting desire to hold gold at the expense of stocks or other assets.

And yet, Trump’s plans for infrastructure spending kept many investors warm to most metals, such as lead, palladium and copper. And, generally, a Trump White House has even turned into a conditional bullish factor for gold, too.

“It’s hard to be bullish on gold and the stock market, but inflation is the linkage there,” said Rob Lutts, chief investment officer of Cabot Wealth Management. “I’ll buy stocks because I know companies can adjust” to inflation. But with an inflation backdrop, gold prices will clear $2,000 an ounce in two to four years, he said.

I’m not saying we’re going to 5% [inflation] again, that’s not reflected yet in the price of gold,” Lutts said. “That means gold won’t be top performer, but it’s a portfolio stabilizer. I really believe in the preservation of capital through gold.”

He prefers exposure to the gold-mining exchange-traded fund SPDR S&P Metals & Mining XME, +0.32%  , whose price, he says, has been driven down to more attractive levels thanks to the commodities downswing and high-profile trouble for miner Glencore GLEN, +2.14%   that bottomed in 2016 but only after forcing the industry to belt-tighten.


Howard Marella, president of futures-trading firm Icon Alternatives, says markets are prepped for inflation, although gold still has upside, especially because the true “normal” cyclical nature of rising inflation had been artificially held back by easy monetary policy that looks to be no more.

Even Donald Trump isn’t a risky surprise for markets if those markets are allowed to react and adjust, Marella argued.

“A real rally has stair steps. I wouldn’t call inflation a black swan. I wouldn’t even call Trump a black swan,” Marella said. Upbeat business expectations, should Trump’s pro-growth, regulation-lite pledges become reality, could nudge inflation along faster, particularly through rising equity and commodities prices. The real potential black swan might be an inflation no-show, he said.

In fact, some contrarians argue that global forces, as other major economies lag U.S. growth, could keep inflation in check.

But at the end of the day, uncertainty tends to underpin gold. Period.

“2017 will certainly be an eventful and unpredictable year given the high degree of geopolitical uncertainty, with a more nationalistic U.S. president in residence and the indications that the U.K. will pursue a hard Brexit in its negotiations with the European Union,” the LBMA survey’s commentary offered, also pointing out uncertain elections this year in France and Germany, as well as the potential for tensions between the U.S. and China.

On the downside for gold are the anticipated three U.S. rate hikes this year.

“I have coined the phase ‘2017 is the year of the trader’ for a reason,” said Zaner’s Thomas. “Right now we only have algorithm traders and as such, the voids or vacuums [of potential gold buyers] under the markets are cavernous. When we move, it’s always an over-reaction. Look for big swings to both sides driven by a multifaceted palate of reasons.”




Nuria Pujol