Outlook For Gold Prices: A Bearish 2017 Outlook

This article was written by Cole Winston, a Financial Analyst at I Know First.

Outlook For Gold Prices

Summary

  • Monetary Policy
  • Political and Geopolitical Uncertainty
  • Economic Data
  • Price Action
  • Conclusion

Outlook For Gold PricesGold. That mysterious shiny metal with which we are all familiar, yet which seems to remain clouded in confusion. Understanding Gold requires identifying its key fundamental price drivers. Over the long-term, factors other than supply and demand generally influence the price of Gold. However, over the short-term it is supply and demand that are wholly responsible for its price movements. Therefore, these short-term drivers are the focus of this article as we explore the outlook for Gold for the remainder of the year.

Monetary Policy

Since the 2008/09 global financial crisis and recession, central banks have embarked on highly-unorthodox policies to stimulate their economies. Their chief aim was to refuel consumer spending through an unprecedented scale of credit creation, via manipulation of interest rates.

By taking interest rates to unprecedentedly-low levels, most assets were stripped of their yield; an unintended consequence. This destruction of yield left financial market participants starved for yield and in search of somewhere to park their money. Gold became an attractive idea in this environment. However, a decade later, central banks are planning to exit this experimental period, which will cause rates to rise. Because rates and Gold are inversely related, this major factor will decrease the attractiveness of a long position in Gold.

Financial markets are all about opportunity costs and where the best opportunities lie. As Gold is a yield-less asset, in times of monetary tightening (i.e. higher rates), the opportunity cost of holding Gold becomes too great to justify remaining invested in it. As central banks of the developed countries begin to unwind their balance sheets and attempt to return to normal-condition policies, Gold will likely lose its attractiveness as other interest-yielding assets will become more interesting.

Political and Geopolitical Uncertainty

Market participants generally see Gold as a “safe-haven” asset (an asset that is sought after to limit event exposure), and therefore a hedge against political and geopolitical uncertainty. Some of the major conflicts currently include the wars in Syria and Iraq and the battle against ISIS, the situation in Venezuela, the Trump presidency, the prolonged fallout and continuation of the European sovereign debt crisis, the missile tests of North Korea, along with many others.

Now, although market participants are currently occupied with these developments and their respective event risk, close monitoring has lessened the degree of uncertainty surrounding these issues. That is not to discount the significance of any of these events. It simply signals that whereas Gold might have previously been an attractive place to park your money while letting these global hotspots play themselves out, market participants are learning that some regions are becoming less threatening to the financial markets.

An example is North Korea. As one of the most irrational political actors, one would expect them to continue conducting missile tests in violation of American and Chinese demands. However, after immense pressure and posturing from these two powers, North Korea has already decreased its missile tests, likely fearing the consequences discussed by ranking American government officials and military personnel. Therefore, although the uncertainty concerning North Korea certainly still exists, it is greatly diminished. Similar developments in other conflicts all collectively pose a bearish threat to Gold, as Gold’s role as a safe-haven asset is called into question.

Economic Data

Creating inflation in the economy is a major aim of central banks worldwide. After much blood, sweat and tears, the central banks of major developed economies are struggling in a big way to accomplish this task. In fact, these economies have arguably been experiencing deflation, let alone no inflation. The multiple deflationary lost decades of Japan are a perfect example of the outlook for these failed policies. This is also why the monetary policy experiment continues to this day, rather having been ended many months, or years, ago.

Since market participants seek out Gold as a hedge against inflation, the existing lack of inflation presents another headwind for the outlook of Gold for the rest of the year. Historically, previous cases of inflation, high inflation, and even hyperinflation have caused fiat currencies to collapse; an extremely bullish development for Gold. However, in times of deflation, the increase in the value of these same currencies removes Gold from the top of the list as necessary for financial survival.

Price Action

The fundamentals underlying any trade idea are generally ineffective without the price action to back it up, demonstrating to market participants in real-time that the market the time is appropriate for execution. Consequently, the reconcilability of technical performance of any asset and its fundamentals is central to the success or failure of any trade.

It is therefore an encouraging and positive sign that, coming off of early 2017 bullish sentiment, the price action of Gold (as seen below), represented here by State Street Global Advisors’ SPDR family of exchange-traded funds (AMEX:GLD), has begun to move towards the downside in accordance with the underlying fundamentals outlined above. Over the past few months the uptrend has turned bearish for GLD as the bulls have run out of steam, leading to the shrinking momentum – and even reversal – to the trend.

Additionally, their exists confluence in the price action on multiple timeframes (namely the monthly, weekly, and daily timeframes). All point in the same direction, signalling that it very well might be time to consider either exiting long positions or initiating short positions in the near future. This ETF, the largest physically-backed gold ETF in the world, warrants a further look.

Conclusion

Of course, nothing is certain. As participants in the financial markets, we are in the very business of managing risk and uncertainty. In light of this, Gold might very well have room to run on the downside through the rest of 2017, given the multiple factors at work in the international community. As risk operators, it is our duty to allocate capital towards the most attractive opportunities. Opportunities where the technicals are aligned with the fundamentals fall under this category. This is the case with Gold.

At the end of December 2015, I Know First published a bearish forecast on Gold in 2016: https://iknowfirst.com/gold-forecast-for-2016-based-on-a-predictive-algorithm. In agreement with the forecast, gold prices slid down since this bearish forecast on Gold , as depicted in the price charts above.


Outlook for Gold Prices