Gold had a virtual rollercoaster ride in 2016. From the lows of January 2016, gold rallied nearly 30% before giving up a chunk of the gains in the light of Trump’s aggressive growth pitch. Economic growth and gold prices rarely go hand in hand. Gold is a parasitic asset class that typically thrives when there are question marks over other asset classes. So what does gold hold for the year 2017?
Keep your eyes on Trump…
A key determinant of gold prices could be the statements emanating from Trump. On the economic front, Trump has spoken about cutting taxes and increasing investment in infrastructure. Both are structural in nature and favor equities more than gold. A hawkish rate stance from the US Fed is likely to keep the dollar strong. The US Dollar index is already trading at a 14-year high. Gold and dollar have typically moved inversely. With the dollar likely to outperform global currencies, any sharp spike in gold prices looks highly unlikely. Lastly, we come to the issue of geopolitical risk. The biggest rally in gold happened in the 10 years between 1971 and 1980 when global geopolitical uncertainty was at its peak. With Trump likely to follow a hands-off policy in the Middle East & West Asia and also reduce US involvement in the NATO, we do not foresee the possibility of any major geopolitical risk. Outlook for gold will, therefore, continue to stay bleak!
Gold demand in India…
Gold demand in India could be hit by a variety factors. According to the World Gold Council (WGC), year 2016 was one of the worst years in recent memory in terms of Indian demand for gold. That could continue in the year 2017 also. Secondly, the restrictions that the government has imposed in terms of buying, holding and creating audit trail of gold could be a big dampener for gold demand in the near future. We find that households are now less inclined to hold their assets in gold as the returns over the long term do not seem to justify the risk. Also there are too many questions being asked by the taxman which is making the regulatory cost of buying gold quite steep.
How to approach gold in 2017?
We do not see any compelling reason for increasing allocation to gold. On the contrary, we expect gold to come under pressure due to money shifting to more aggressive growth assets like equities. However, it may make sense to continue to keep your base allocation to gold constant. A 5-8% exposure to gold gives your portfolio the required insurance during tumultuous times. About gold bonds one must remember that the advantage of higher gold prices will not exist in 2017. The prospect of earning 2.75% interest, by itself, may not be too salivating. Gold may, at best, be a minor hedge in 2017! ©