A Trump / Le Pen insurance

Following a steady drop from USD 1,360 per ounce in the summer of 2016 to USD 1,150 at year end, the gold price is now back on the rise. Investor demand through ETFs (and similar) resumed in January, after dipping in the aftermath of Donald Trump’s election.

Even with this dip, 2016 turned out to be the best year since 2009 for gold ETFs, which saw near record inflows of 530 tonnes. Demand for gold bars and coins meanwhile remained quite stable at 1,030 tonnes, albeit with huge regional divergences. Demand was very robust in China and the US but weak in Europe, East Asia, India and the Middle East. As for golden jewellery demand, it fell 15% to 2,040 tonnes in 2016 largely due to regulatory issues, a cash squeeze in India (-22%) and supply problems in China (-17%).

goldGraph(Source : Bloomberg)

Predicting the direction of the gold price on a supply/demand basis is very difficult because of the numerous variables involved. That said, the outlook does look rather promising – provided central banks do not reverse course. Beyond the fact that they are a very big player in the gold market – 2016 was their seventh consecutive year of net buying, at close to 385 tonnes (with Russia, China and Kazakhstan in the lead) – they also set interest rates. For the time being, interest rates in the major developed economies remain close to or below the inflation rate, which is supportive for the gold price. So long as inflation does not get out of hand (i.e. remains below 3-4%) we believe that interest rates, at least at the short end of the curve, will continue to lag the inflation rate.

Pent-up demand in India and China should result in higher figures for bars, coins and jewellery this year, while investor demand for gold ETFs is also likely to stay strong due to political uncertainty, be it in the US (following the first Trump decrees) or in Europe (with upcoming elections that could further destabilize the Union should one or more populist candidates come to power).

With the future path of the gold price looking upward, we would recommend owning some gold and carefully selected gold mines in portfolios.