Gold set to move decisively in rest of 2017

From the beginning of this year, gold prices have been stuck in a range, with seemingly little prospect of a decisive directional change anytime soon.

While recent geopolitical developments (Syria, North Korea) did propel the yellow metal higher, the effect of such incidents is short-lived. Prices declined from around $1,280 an ounce ten days ago to about $1,255/oz recently. However, things can change dramatically in the months ahead.

The second half of 2017 could prove interesting for the gold market. There are both demand-side and supply-side factors that have the potential to sway the market.

Clearly, the dominant factor would be expectations of change in the US Fed monetary policy. The Fed has repeatedly asserted that its decision on a rate hike will be data-driven. If macro data flow in the months ahead proves to be positive, the chances of the Fed hiking interest rate would increase. From various statements, it appears the Fed is determined to hike rates at least once, and possibly twice, this year.

That would also send out a positive signal about the economic performance of the US — the world’s engine of growth — which in turn would strengthen the dollar as well as boost the equities market in addition to making credit a little more expensive. Because gold is traded in dollars, a strong dollar will drive gold price down. Additionally, less-committed investors will exit gold and move to the equities market. We have seen this happen time and again.

The US-centric political angle to gold prices cannot be overlooked. Although the country itself is a small consumer of the yellow metal, its economy, monetary policy and currency exert significant impact on gold prices. While President Donald Trump has made known his economic vision to boost growth, including corporate tax-cuts and huge expenditure on infrastructure development, there are now creeping doubts over his ability to push through these measures.

What if the US President is unable get through his agenda and fails to deliver on his promise? That would be a huge boost for gold prices as safe-haven demand will resurface.

At the same time, several economists have asserted that the increasing bearishness about US growth prospects is probably unwarranted, and the sentiment is perhaps overdone. Many expect growth to rebound in the quarters ahead from the low point of Q1. In the event, gold will come under increasing pressure. The second half of the year is, therefore, likely to be crucial for a directional change.

From a demand perspective, seasonal factors come into play between June and September. Physical demand in India usually tapers off during the period as people in large parts of the country, especially rural areas, take to agricultural operations. The next high-demand period begins at the time of harvest in September.

From a supply perspective, growing mining output is something to reckon with. At current prices, gold mining is a profitable proposition; over 90 per cent of the world’s gold mines are cash-flow positive. Extraction costs too are down, with technological improvement and low energy costs.

In sum, while gold might already be past its peak for the first half of the year, it is not likely to stay range-bound in the second half of the year. The market will be subject to Trump-induced volatility as well as changes in US monetary policy and mine supply.

The author is a Commodities Market Specialist. Views are personal