These trends will support gold demand throughout 2017

News Arnulf Hinkel – 03.02.2017

The World Gold Council recently published its outlook on gold demand for 2017. Supported by renowned analysts, six major macroeconomic and geopolitical trends were identified and evaluated that might determine gold demand in 2017. The analysts involved: Jim O'Sullivan, High Frequency Economics, John Nugée, former Reserve Chief of the Bank of England and David Mann of the Standard Chartered Bank. Continue reading for a brief summary of this highly interesting outlook.

The first trend is that political risk is expected to increase in 2017. In addition to the already noticeable effects of the Brexit, the reason for the more unstable pound sterling, as well as the political imponderables of the Trump presidency, there will be key elections in the three European countries Germany, France and the Netherlands. Their outcome is uncertain, due to the fact that citizens' Europe-critical tendencies are intensifying.

These geopolitical risks have already proven to be a driver for gold demand in 2016.
Another trend that might support gold demand is the risk of depreciation of certain currencies as a result of the divergence of monetary policy between the FED and other central banks such as the ECB. In this scenario, tight monetary policy meets expansionary, leading to fears of currency depreciation. Investors as well as central banks in countries pursuing a tight fiscal policy already reacted in 2016 by increasing their gold purchases.

The noticeable upward inflationary trend in many countries – especially in Germany, among the EU countries – is preventing any prospect of raising the interest rates in the near future, rendering bonds and other fixed-income assets less appealing to long-term investors, while gold is gaining in attractiveness at the same time.

Better go for stocks? After all, lead indices have had a significant rebound in the last stretch of 2016, and the Dow Jones index even took the 20,000 points barrier for the first time in its history. However, this development should be viewed with caution, as investors, bullish due to the election of Trump as US President and his announcements of an economic miracle – albeit limited to the US – could very well create a bubble that might lead to a stock market correction. Against this backdrop, gold plays an important role as an instrument of portfolio diversification and for hedging against tail risks, i.e. the risks of unexpectedly strong losses.

The trends identified thus far are concentrated in the Americas and Europe, but developments outside of these regions will also influence the demand for gold. In Asia, gold demand generally closely correlates to increasing wealth. Accordingly, the combined share of world gold demand for India and China grew from 25 per cent in the early 1990s to more than 50 per cent by 2016. And other Asian countries such as Vietnam, Thailand and South Korea also have vibrant gold markets. According to calculations by Standard Chartered Research, the Asian countries will be responsible for around 60 per cent of global economic growth in 2017, which in turn means that the strong demand for gold is very likely to continue. This demand is by no means limited to the traditional Chinese jewellery purchases: the assets under management in Chinese gold-backed ETFs have grown almost six-fold in 2016.

Also, new markets for gold have emerged. After gold-backed ETFs conquered the Western financial markets, emerging market preconditions have recently been set to provide easier ways of investing in the precious metal. The AAOIFI (Accounting and Auditing Organisation of Islamic Financial Institutions), with support from the World Gold Council, launched the Sharia Standard for Gold, opening up the Muslim world to gold investments. Significant demand for gold is expected in the years to come, which could further boost global gold demand – and thus the gold price.

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