Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold advanced to an eight-week high on Monday in relatively brisk holiday trading in the US as the metal find support from safe haven buyers worried about the broader geo-political impact of the incoming Trump administration, the fallout from Britain’s exit from the EU and upcoming elections in Germany and France.
Gold for delivery in February, the most active contract on the Comex market in New York, hit a high of $1,208.70 in early dealings, up 1% from Friday’s close before giving up some of those gains. Gold ended the day above $1,200 for the first time since November 22.
Gold is now up just shy of 5% in January, but is still trading down $130 an ounce from an initial but brief surge on election night as results showed a likely victory for Donald Trump in the presidential race.
Source: Bloomberg, Capital Economics
Gold has come under pressure because of bets that a Trump administration will lead to strong US economic expansion, higher interest rates and a stronger dollar.
Higher real interest rates boosts the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing and investors have to rely on price appreciation for returns.
Gold also has a habit of starting off well in a new year – since 2000 gold prices rose in January nearly two-thirds of the time, but a new note from analyst Simona Gambarini at London-based Capital Economics warn that gold’s advance in 2017 may be shortlived.
First, we expect the Fed to tighten monetary policy by more than investors are discounting, as inflationary pressures in the US build – our forecast is that the central bank will raise the federal funds rate by 25bp on four occasions. Against this backdrop, we expect the real yield of US 10-year TIPS [Treasury Inflation Protected Securities} to climb, increasing the opportunity cost of owning a real asset like gold that pays no interest.
Second, we expect the US dollar to continue to strengthen a little, as the contrast in the monetary policies of the Fed and other central banks proves to be much starker than investors are currently anticipating.
And third, we forecast that physical demand for gold from emerging markets and central banks will remain subdued.
Capital Economics forecasts gold to trade at $1,050 by the end of the year, in line with lows hit towards the end of 2015.
7 Comments
JJ
It will take one stupid action or statement from the Trump administration to create chaos somewhere in the world, and the price of gold will quickly increase.
JH
USDX down 120 basis points. Gold up $20. Go figure.Credibility zero. 17 Jan.
Tom
Gold will go up because it has bottomed. Everything else is irrelevant.
Honest Misanthrope
More wild speculation about events, politicians and policies, that change all the time and that no one can predict. And besides, the world and gold prices are much bigger than local US politics. Gimme a break. Technical analysis with basic trend lines, support and resistance is your only friend when it comes to gold or any other world asset class for that matter.
IAM Alexander
Indeed a correction is coming but in the opposite direction than purported in the article. US Congress just pre-approved a budget attached to Obamacare repeal that anticipates additional 10 trillion dollars of debt add over next 10 years. How long do you think the FED and investors can lie to themselves and people, thinking they can print their way out of this mess? Anyone with half of brain and common sense realized what lies ahead and the forecast is catastrophic if the binge US spending continues, which in turn will make gold a safe haven and set the prices to record highs! Will the US continue to spend and print under Trump, you bet they will, which is why outgoing Treasury Jack Lew insisted Congress scrap debt limit all together so that money can be borrowed without Congress needing to approve it.
curley
Trump will be a total disaster and gold will soar. 1800 by May.
dutchmann64
I think it will be a year of turmoil;….Trump effect has yet to set in as we are all on the edge of our seats. I am on the Canadian side of the boarder and already this guy has caused project cancellations ( ie. Ford MOTOR ) here in Canada. Yes the plant was pulled from Mexico, but we were building equipment for that plant. His new boarder tax and threats to tear up NAFTA yet to play out. The world will react accordingly and again this will be nothing but trouble for all.