(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Dec 19 It was supposed to
be a good year for gold, given all the uncertainty and surprises
over the U.S. presidential election, the British vote to leave
the European Union and general concern about the health of the
But things didn't quite pan out the way gold bulls would
have hoped, and now they face a new year where the price of the
precious metal is likely to be hostage to developments that are
The two main risks for the gold outlook for 2017 are what
actually happens in the presidency of Donald Trump and how the
demonetisation of Indian Prime Minister Narendra Modi plays out
in the world's second-largest consumer of the precious metal.
Gold certainly enjoyed a strong first half in 2016, with the
spot price gaining almost 30 percent between the end of
last year and the intraday high this year of $1,374.91 an ounce
on July 6.
However, since then it has slid 17.5 percent to the close on
Dec. 16 of $1,133.99 an ounce, as investor sentiment swung from
gloomy to optimistic that the United States will help lead
global growth and reflation.
Much of the newly-found optimism is based on the view that
Trump will be able to kickstart the U.S. economy through his
plans to spend up to a $1 trillion on infrastructure and other
Equity markets and industrial metals have enjoyed strong
gains since Trump's surprise victory over Democrat Hillary
Clinton in the Nov. 8 vote, with the U.S. dollar also rising as
investors expect the Federal Reserve to continue raising
interest rates after this month's hike.
The market's expectation for Trump's presidency is bearish
for gold as a rising U.S. dollar and interest rates, coupled
with strong equity markets, leaves the yellow metal out in the
But the markets have so far priced in all the positive
outcomes from Trump, while ignoring the potential negatives.
While Trump has clearly stated he wants to boost the U.S.
economy, he has also clearly stated he intends to take the U.S.
out of global and regional trade agreements, and impose tariffs
on goods on various countries, including China.
He also wants to restrict immigration into the United States
and build a wall along the border with Mexico.
The view investors have taken so far is that Trump will do
all the good things for the economy and none of the bad.
IRRATIONAL TRUMP OPTIMISM?
This seems unduly optimistic and gives gold the opportunity
for gains in 2017 if Trump disappoints the expectations now
being built up around his presidency.
While it would be economically stupid to spark a trade war
with China, it's not beyond the realms of possibility that Trump
will do it anyway.
It's also far easier for a U.S. president to impose trade
barriers using executive powers than it is for him to pass tax
cuts and raise money to spend on projects, as these decisions
have to go through Congress.
Beyond Trump, gold will also depend on what happens in China
and India, the two major consuming nations.
China's gold demand has dropped this year, with third
quarter consumer demand at 182.5 tonnes, down 22 percent from
the same period in 2015, while India's 194.8 tonnes is 28
China's gold demand should be at least steady in 2017, with
some upside as consumers buy into rising prices in local
But India's gold demand will be far from certain in the
aftermath of the government's decision to withdraw 500 and 1,000
rupee ($7.37 to $14.75) notes, which represent about 86 percent
of all notes by value.
Indians mainly use cash to transact and the withdrawal of
the two largest denomination notes has led to shortages of money
as people struggle to pay for goods and services.
Gold will be affected as well, given many Indian families
use cash to buy gold, especially during the wedding season.
It's likely that gold demand will be crimped by the
demonetisation policy, but the key question is for how long.
It's possible that as cash shortages ease, consumer gold
demand will bounce back.
But it's also possible that the government's aim of cracking
down on the informal economy will hurt gold demand as consumers
are left with little choice but to put money into banks rather
than use cash to buy gold.
It's estimated that as much as one-third of India's annual
demand is paid for by "black money," funds held in secret by
people to avoid paying tax.
The impact of India's demonetisation on gold demand is far
from certain, and similar to Trump's presidency, it's difficult
to make definitive predictions.
(Editing by Richard Pullin)