MARKET INSIGHT
The story of gold in 2017 is one of politics, headlines and threats of war. The inverse relationship between gold and the greenback makes it all but impossible to talk about the safe haven against anything other than US actions and dollar strength.
The year began far better for gold than many would have envisaged at the end of 2016. The Federal Reserve’s rate hike in December sent the dollar soaring and punished the metal; but then a wildcard president took the reins in January. Uncertainty over President Donald Trump’s policies, comments from his senior advisors on the strength of the greenback, and skepticism over the Fed’s hawkish outlook, all collaborated to weaken the dollar. March saw gold come under pressure as the Federal Open Market Committee meeting loomed and investors prepared for a possible rate hike.
As we neared the end of President Trump’s first 100 days in office, geopolitical tensions reached boiling point, pushing gold prices to five-week highs in early April. Washington’s warnings that it would act alone to end North Korean nuclear aspirations, added an undercurrent of anxiety to the markets that was compounded by first a missile test from North Korea and then a US missile strike on Syria. Gold approached the key level of $1,300 on 13 April, benefitting from greenback weakness and geopolitical tensions. It receded towards the end of the month, concluding the last trading week of April at $1,275. Anticipation of a US interest rate hike in June supported the bulls, as did uncertainty over the UK general election called in April and slated for June. On June 29, the Trump administration announced plans to sanction Chinese companies thought to be aiding Pyongyang’s nuclear programme. The move saw the greenback weaken against its major counterparts, enabling gold to recover short-term losses and trade above $1,250.
The first week of the third quarter left gold bulls with a nasty taste of defeat in their mouths, as the dollar stabilised and the commodity posted its largest one-day fall for almost eight months on July 4. The downside pressure was further compounded by the rumor of tightening global monetary policy, which forced some dormant sellers back into the market. At this point, the trading direction shifted, with many suggesting that the bullish bond market was coming to a close. Central bank hints of rising borrowing costs suggested that interest rates, not political machinations, would be the driving factor behind precious metal prices going forward. These predictions failed to come to fruition, and gold staged an incredible rebound in early August, as yet more political uncertainty in Washington in the form of Trump’s failed health care plan, drove demand for safe havens. The dollar index lost 2.66 per cent over the quarter, supporting gold’s upside. While the Federal Reserve failed to raise interest rates in the third quarter, a hawkish statement from the September meeting had a negative impact on the precious metal.
Gold entered a sustained downtrend from September that saw the yellow metal plummet to seven-week lows of $1,270 in the first week of October. This downward trajectory was compounded by firming US rate hike expectations and a strengthening dollar. Investors charged into the final quarter with a ‘risk-on’ attitude, with some analysts suggesting that the metal could be downright dull for the rest of the year. They were soon proven wrong, and gold fell 0.7 per cent in trading on November 10, as US Treasury bond yields rose before recovering some of those losses, as ongoing uncertainty over US tax reforms provided some support. The US premier also broke with tradition in early November, announcing a new Federal Reserve chair. His pick — cautious dove Jerome Powell — may not influence the gold price in the short-term, but investors will certainly be paying close attention to him next year. Gold received a boost on November 15 thanks to a vulnerable US dollar and depressed stock markets. Caution lingers in the air as uncertainty over the outlook for US tax reforms is encouraging investors to look at safe-haven assets, which in turn should offer some support to gold.
Traders have spent much of the last 12 months debating whether geopolitical tensions or monetary policy are the biggest drivers of gold price this year. As we approach the end of 2017, the question now becomes, could the persistent threat of conflict and dollar volatility transform the yellow metal into a battleground for bulls and bears into the first quarter of 2018?