Gold market update- Ramakrishnan Iyar 12-29-16

The future outlook for gold prices


Gold has already shown how uncertain the price can be by posting a rise of 5% during the period of uncertainty about the outcome of the presidential election in the US. Gold prices have since fallen by around 9% and experts believe that this may present a buying opportunity before the next price rise. Among the factors influencing the price of gold is the supply and demand. The demand for private use can be categorised as investment and non-investment. Estimates say that between half and two thirds of all annual gold production is utilised for private use. The non-investment category can be divided into other areas such as the use of the precious metal for dentistry, manufacturing and industrial use. These needs account for roughly 15% of annual production and the gold is not easily recoverable and needs to be replaced. In terms of production, approximately 3000 metric tons of gold was freshly produced in 2015, of which almost a third was consumed by China with India on its heels. The United States follows as the third largest consumer and Germany is in fourth place. The next major factor is inflation, which has been on the low side in the major trading countries. Finally, the factor which causes the main influence on gold price this year has been the geopolitical risk, particularly the distressing situation in Syria, which threatens to shake the entire Middle East. Indian the second biggest consumer of coal has just abolished around 86% of the currency notes in circulation without any notice and may be considered a catalyst for a possible move into gold in preference to holding currency.


One common view is that the gold price has now surrendered its gains because the initial fears about the possibility of Donald Trump as US president have been settled and the speculation is now about the inflationary effect of his plans for investment which could strengthen the dollar and put pressure on gold prices. Interest rates could rise and hurts the prices of gold. The market believes that there is a 99% chance that interest-rate will rise after the Federal Reserve meeting. Gold prices tend to move in opposite directions to the level of the US dollar. Market participants such as Credit Suisse see gold prices at $ 1500 per ounce by early 2017 though some bullish participants feel that prices could rise to as much as $ 1900 per ounce by the end of the year. Analysts feel that the gold price forecast for 2017 is bearish and not as bullish as some people tend to believe.


There is no doubt that gold will continue to be a hedge against fear and uncertainty in 2017, but considering that the stock markets, an important indication of risk, are turning bullish and that higher prices are forecast in 2017, gold could take a knock because of the reduction in the fear factor. During the early part of 2016, gold prices rallied because of the fear factor, but this has changed considerably. Gold should continue to move towards the lower area of the trend where support is currently available at round $ 990 per ounce. This could decline to $ 890 per ounce during the second half of 2017. In other words, gold could hit $ 890 per ounce in 2017 after which it could turn into a new strong bull market.


Gold is likely to be affected by the more optimistic prediction of global economic growth and a tighter interest rate policy from the Federal Reserve, which could result in weaknesses in price. If it is accepted that a positive economic outlook exist for global growth, the safe haven demand for gold is likely to decline despite the continued existence of geopolitical risk and tension.