Moneycontrol
Jul 23, 2017 12:18 PM IST | Source: Moneycontrol.com

Gold to move in a narrow range in 2017 but could move to $1450/oz in 2018

There is a risk that the entire reflation trade (post-Trump win) can go for a toss, effectively augmenting the safe haven appetite for gold.

By Hitesh Jain, IIFL Wealth & Asset Management

Gold prices have been on the defensive despite a weak US dollar, quite bizarre given that other commodities have benefitted from the currency induced movement. Relatively hawkish remarks from various central bankers and rising sovereign bond yields seem to be a sore point for the gold bugs.

After the series of Fed rate hikes, ECB President Mario Draghi has hinted towards a possibility of tapering the bond buying programme, while BOE Governor conceded that a rate hike is needed somewhere down the line. Meanwhile, Bank of Canada has already embarked on the path of policy normalization, delivering a rate hike after seven years.

Conversely, BOJ continues to remain dovish, indicating that there is no need to hike interest rates anytime soon, as the economy still survives on monetary stimulus. With inflation well below 2 percent, BOJ’s bond purchase program also needs to be maintained.

On speculative front, funds and non-commercials have been trimming their net long positions on COMEX gold over the past few weeks.

On short term outlook, it is an onerous task to gauge how the yellow metal will respond to the counterbalancing forces of rising sovereign yields, buoyant global equities amid weak greenback and aggravating legislative & political uncertainty in the US.

It seems to us that gold prices will drift in an in uneventful fashion over the next few months given the prevalent landscape. Although equity valuations look frothy, surplus liquidity across the globe will avert any significant or long-lasting correction.

Nevertheless, murkier US legislative backdrop will provide an element of support to the yellow metal over the long term.

There is uncertainty over legislative agenda given the difficulty in passing a new healthcare bill through US Senate.

It still remains unclear whether Republicans will garner the required majority to navigate it through a stubborn opposition, where several members of the Senate are neither endorsing the new measures nor supporting the vote to repeal Affordable Care Act altogether.

The million dollar question remains that when will Trump administration start working on other important legislative agenda (much awaited by the markets) like tax reforms and infrastructure spending. There is a risk that the entire reflation trade (post-Trump win) can go for a toss, effectively augmenting the safe haven appetite for gold.

Moreover, geopolitical developments pertaining to North Korea can prove to be a wildcard. Pyongyang recently tested an intercontinental ballistic missile, which has the potential to hit American shores.

This has prompted the US to call for a unified global action against North Korea. Recent efforts by US President Trump to dissuade North Korea from the nuclear proliferation programme has failed, which can intensify the levy of sanctions and other punitive measures against the isolated nation.

The US and South Korea has already retaliated by launching missiles, however, we sense that Pyongyang remains indifferent to such threat and the situation will remain tense for some time to come.

This also evolves the power equation in the region given that China remains an ally of North Korea, while South Korea and Japan are inclined towards the United States.

On the price front, we see gold trading within the range of USD 1,185-1,300/oz over next 2-3 months. As far as the broader call is concerned, we see values moving towards USD 1,450/oz by the first half of next year (June 2018).

Disclaimer: The author is Alternate Research, IIFL Wealth & Asset Management. The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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