Below is the views on Gold Outlook by Mr. Chirag Mehta Senior Fund Manager - Alternative Investments Quantum Gold Fund, Quantum Gold Savings Fund, Quantum Multi Asset Fund & Quantum Equity Fund of Funds
January has been the strongest month for gold over last decade. This fact is driven by the two biggest buyers getting involved in the gold market: There is a rush of Chinese buyers during the lunar New Year, and Indians prepare for the marriage season. Keeping up with seasonality, this year has been no different. Despite the reflationary headwinds following Trumps presidency, gold managed a strong rebound as rising uncertainty from Trumps first policies led to increased gold allocations. Weaker than expected economic data along with Trump‟s unconventional rhetoric on trade and currencies led to a depreciating U.S. dollar, further supporting gold prices. All in all, gold ended on a strong footing at $1210.65 an ounce, a gain of +5.07% for the month.
Behind gold's ascendancy have been whiffs of inflation and the potential of a trade and/or currency war as Trump introduces his “America first” policies. There are early signs of potentially higher inflation down the road. Inflation is rising faster than many investors may realize in pockets like housing prices, uncontained medical inflation, rising wages and more. Putting the interest of one‟s nation first may be understandable, but some caution should be expressed about the aggressiveness of Trump‟s tone in today‟s globalized world. Slapping a 20% tariff on Mexican imports to pay for the wall is in essence a 20% tax on the American public. Americans will pay for the wall in higher cost of goods. Trump has also been very clear about his goal of slowing US corporate outsourcing of labour to foreign countries, which could end up being quite inflationary.
There is fear that Trump may start a trade war, furthering a renewed currency devaluation race. Economic growth in the U.S. slowed more than what was forecasted last quarter on the biggest trade drag in six years. Net exports subtracted 1.7 percentage points from expansion in the October-December period, as dollar strength was likely a drag on growth. Should the new Trump administration push for a weaker dollar, this could lend support to gold. In an interview with the Wall Street Journal, Trump said that the US dollar was, “too strong.” “Our companies can‟t compete with them [Chinese companies] now because our currency is too strong. And it‟s killing us.” If there is turmoil in currencies, gold can shoot up sharply. On the other hand, if currencies stabilize, expect gold to drift down.
In only his first weeks, we have seen President Trump initiate procedures that would encompass massive infrastructure projects, like the wall between the United States and Mexico, and remove major regulatory policies, as in the case of the Keystone pipeline. Although it is still extremely early in this new administration, it seems many threads that were present in Trump‟s campaign promises are transforming themselves into policy and procedures. It appeared to surprise some traders when the Fed held, but given the recent turbulence in equity markets and some discomfort on how the administration is executing strategy, it appeared to be a given that the Fed would wait.
The language, however, suggested that the Fed was eyeing inflation, which may be the set-up for a March hike, but elections in Germany and France may give the Fed enough excuse to skip action at the March meeting. Global Central Banks are in a holding pattern as they wait and assess the effect of policy implementation and the leadership style of President Donald Trump.
January jobs printed well above the consensus estimates of 180,000. A number above the 200k mark should have ideally placed a March Fed hike firmly on the table. Prices, however, reacted higher, likely because of downward revisions in previous months and a slight reduction in the wage index. Traders took it as a set-up for an excuse for the Fed to wait in March, which hurt the dollar and pushed traders to cover some shorts. The Fed is currently more focused on inflation and Trump‟s fiscal policies. Maybe the Fed does nothing and lets the economy roil, and equities bubble higher and inflation run hotter, and worry about the consequences later in the year.
The market-determined long-term real interest rates have increased by 40 basis points in the aftermath of the U.S. a presidential election, which means that the Fed is already behind the curve. Hence, it is not simply that higher interest rates threaten growth. It seems that the opposite is true right now: interest rates are higher since growth expectations are stronger. Indeed, markets seem to be comfortable with the Fed‟s move, as credit spreads are still relatively low. There is agreement that the economic outlook has improved, which justifies higher interest rates. In other words, the Fed‟s tightening is considered as a vote of confidence in the economy and a sign of policy normalization after the unprecedented measures implemented after the financial crisis.
The major fundamental forces affecting the gold market in 2017 will be the strength of the U.S. dollar, the dynamics of the real interest rates, and the level of policy-induced fear in the markets. The much anticipated political and market uncertainty diminished after China‟s turmoil, the Brexit vote and the U.S. presidential election. The world is full of risks, but the sad fact for the gold market is that financial markets showed great resilience to them in 2016, shrugging off practically all bad news, or even using them to rise up. Therefore, although investors should not downplay the potential threats to the global economy, they should focus on the relationship between gold and the U.S dollar in light of real interest rates.
We believe that the fundamental outlook for the gold market may not be so encouraging until people expect Trump‟s reflationary forces to mend the economy. However, as markets lose their faith in Trump‟s pro-growth policies or as financial turmoil forces the Fed to adopt a more dovish stance, gold should start heading northwards. However, aggressive Trump policies could prepone gold‟s ascent by wreaking havoc in the currency and asset markets, causing people to drive into assets like gold in their uncertainty.The world is in great disequilibrium, both with respect to the global economy as well as geopolitics. There exist more uncertainties than certainties in the global macroeconomic environment of which Trump‟s presidency is a big unknown. We believe that barring the near term, gold prices should start moving gradually upwards in 2017.
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