November 2016 – Week 5 Edition

Some Major Financial Firms See $1,440 to $1,550 Gold in 2017

Britain’s HSBC bank is projecting gold at $1,550 per ounce by the end of 2017. Trump’s protectionist stance in the campaign, if he follows through with it while in the White House, could trigger trade wars that will destabilize global markets, which would boost gold prices. “With Mr. Trump openly questioning decades-old military and political alliances and the European ideal under attack first by Brexit followed by a rise in anti-European sentiment in important European nations, it appears likely that investors will move increasingly into gold.” The recent post-election slump in gold won’t last, HSBC says. “We believe the gold decline will be temporary and that as global risks increase and uncertainty increases globally gold will be utilized increasingly as a safe haven and flight to quality asset. A key that gold has over paper assets, notably currencies, is that it is immune from intervention,” said the HSBC research team.

James Butterfill, head of research and investment strategy at ETF Securities, is bullish on gold, despite the post-election slump, saying “we maintain our gold target of $1,440 for mid-June. Aside from the risk from a Trump presidency, 70% of Europe by GDP has elections in 2017 just when populists are rising rapidly in the polls. Political risks remain high.” Despite a likely rate increase in December, he says this is “a great buying opportunity” since any rate increase reflects “long-term risks of [rising] inflation.”

Gold’s recent correction, he says, results from the assumption that “Trump would be able to enact all his reforms.” He counters: “Once Trump is in the White House it will become evident that he will struggle to enact many of his proposed reforms. Of particular note will be the difficulty in approving a higher debt ceiling to budget for his tax cuts and infrastructure spending…Furthermore, the Fed is likely to allow inflation to run above interest rates, dragging their heels in raising rates” causing a “volatile U.S. dollar.”

A factor in my positive outlook for gold is the growing national debt, now almost $20 trillion dollars, has to be dealt with.  It is at about 75% of the gross domestic product, a ratio not seen since 1950, after the budget exploded as a result of World War II.  If the federal deficit for next year grows substantially, look for 2017 to be a very good year for gold.

Why Gold Recovered on Monday

Gold recovered to over $1,190 on Monday based on bargain-hunting and some short covering from the army of gold-ETF-trading neo-bears on Wall Street. Gold has fallen this month due to a strong dollar, but gold is still holding up well in terms of most of other currencies.  Gold ETF selling has also hurt the price of gold. Bloomberg reported that the gold held by gold-backed exchange traded funds (ETFs) has fallen by 85.5 metric tons so far in November, reaching its lowest level since before the Brexit vote last June 23. Gold selling has accelerated since the Republican sweep in the November 8 elections, with ETF gold shrinking for 10 trading sessions in a row, but gold is still performing better than the stock market this year and silver is still up 20% so far this year, more than twice the increase of the stock market indexes.  Our sales of silver one ounce rounds have been increasing by the day.  These are very popular for investment and, at this time of the year, gift giving.

Government Policies in India and China try to Dampen Gold Demand

Another reason why gold is down is that the governments of India and China – the nations with the largest volume of physical gold demand each year – are working overtime to depress gold demand there.

India’s Modi government is trying to kill the cash economy by prohibiting the use of 500 and 1000 rupee banknotes (worth only about $7 and $14, respectively, at 78 rupees per U.S. dollar).  The government is trying to kill the cash economy during the peak wedding season that runs during the non-monsoon months of September to April.  Jewelers are not willing to stock gold inventory due to shrinking demand from cash customers. “Retail demand is very weak and since prices are falling, jewelers are not willing to build inventory,” said Surendra Mehta, secretary of the India Bullion and Jewelers Association. “Most people used to purchase in cash and now they are confused whether to buy gold or spend on something else.”

An estimated one-third of India's gold demand is paid for by unaccounted cash, so people are scrambling to banks to convert their banned banknotes into legal tender.  That’s problematic in rural areas that have few banks because farmers don’t trust them and mostly do business by cash.  Use of credit is largely non-existent in these areas that account for more than two-thirds of India’s annual gold demand.  Farmers are also struggling to get enough cash together to buy seed and fertilizer for the new sowing season and have little left to buy gold. There’s also hesitation to buy gold in the face a broadly circulating rumor that Modi may impose curbs on domestic gold holdings. Gold premiums dropped to $3 vs. $10 the previous week.         

By contrast, premiums on gold in China more than doubled from $10 per ounce (above spot) to about $25 last week as word spread that Beijing is restricting import licenses. China allows only 15 banks to import gold, including three foreign lenders.  China’s currency, the yuan, hit an 8-year low, so the Beijing government is trying to prop up the yuan. With the Chinese New Year approaching, gold premiums are likely to remain high, with most dealers waiting to buy on dips, such as last week’s lows under $1,180.

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