26 April 2017

Investors rekindle appetite for gold

With gold prices staying robust, investors are shunning equity and hedging themselves by betting big on the precious metal.

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Gold prices have soared by an impressive USD 100 per ounce since the start of 2017, as investors start to fret about expensive equity valuations. As a result, the appeal of safe havens has increased and investors are hedging their bets with alternative investments.

The metal’s nearly 8% gain during the first quarter underscored that sentiment. Most recently, gold got a boost after the US healthcare reform bill was blocked, which left a cloud over the new US administration’s ability to push through several reforms, notably on taxation.

Equity markets have been rising since the US election ended in November in the hopes that new infrastructure spending, scrapping of cumbersome regulations and a more simplified taxation would boost the economy. But that has not yet materialised and divisions within the Republican Party may see further delay in the implementation of new reforms.

Gold investors are responding to upheavals in other parts of the world, too. In March, British prime minister Theresa May had issued a letter to the European Council announcing the formal exit of the United Kingdom from the European Union.

With the backdrop of uncertainty among the world’s traditionally most stable economies, some analysts believe gold could hit USD 1,500 per ounce from its current level of just under USD 1,250. Others however believe the metal will be mostly range-bound for the balance of 2017, as unknown economic policy risk premiums get repriced throughout this year.

The US Federal Reserve has also made its move this year with an interest rate hike, but has been dovish about the pace of future rates.

DOLLAR PARES BACK

The uncertainty has halted the American dollar’s rally. The Mexican peso, pounded by US threats to redraw the North American Free Trade Agreement for much of last year, surged more than 10% against the American greenback in the first quarter of 2017.

 

The Russian ruble gained more than 9%, while other major currencies, including the Australian dollar (up nearly 6%) and the Japanese yen (4.4% higher) emerged stronger since the start of the year.The euro also edged 1.5% higher against the US dollar.

“Upbeat sentiment has also been evident in the euro area in recent months, fuelling expectations that the ECB could further trim the pace of its asset purchases or even increase rates by late 2017 and into 2018,” according to the Institute of International Finance (IIF).

However, policymakers at the European Central Bank would likely keep their powder dry until there is more clarity on the British exit from the European Union.

The British pound gained 1.1% against the US dollar in the first quarter, but it may be hard for the sterling to keep its gains.

The European Union laid out its Brexit negotiating terms, confirming that if Britain wanted to start trade deal talks this year, it would first have to pay tens of billions of euros and give residency rights to the 3 million EU citizens living in the UK, suggesting that negotiations may turn acrimonious, and keep the pound in check.

EMERGING MARKETS

Global emerging markets had been jittery at the start of the year amid situations in developed economies, but they appear to be stabilising.

However, the lack of reforms and significant bills being pushed through in the US is welcome news for emerging markets.

“Absent big wins for the US administration on tax cuts and stimulus more broadly, USD softness may well persist – another boon for EM assets,” according to the IIF.

The emerging market growth premium over mature markets is expected to rise in 2017.  According to the IIF forecast, EM growth will be at least 2.5 percentage points higher than mature market growth this year, up from a differential of less than 1.5 percentage points in 2015.

“This should continue to support EM equities, while low yields and low volatility in mature markets (the MOVE index of US Treasury market volatility has dropped back to pre-election levels) remain very supportive for emerging market bonds.”

Indeed, while developed economies continue to face uncertainty, emerging economies are showing signs of life.

The Chinese economy currently has strong momentum, with high-frequency data showing rapid growth in housing sales, a pick-up in fixed-asset investment, and only a modest deceleration in retail sales growth, said Fitch Ratings.

“We expect (China’s) GDP growth to remain strong at 6.3% in 2017, but efforts to keep the economy growing at its current pace would build financial risks, and could eventually put pressure on the external accounts through a narrowing of the savings-investment gap and current account balance,” the IIF said.

The Chinese yuan ended the first quarter down 0.84% against the US dollar.

GOLD PRICES

DATE

VALUE

2017-01-03

1,151.00

2017-01-04

1,164.25

2017-01-05

1,176.70

2017-01-06

1,175.85

2017-01-09

1,178.50

2017-01-10

1,189.50

2017-01-11

1,178.55

2017-01-12

1,205.05

2017-01-13

1,190.35

2017-01-16

1,203.00

2017-01-17

1,216.05

2017-01-18

1,214.75

2017-01-19

1,196.05

2017-01-20

1,200.55

2017-01-23

1,212.85

2017-01-24

1,216.80

2017-01-25

1,195.00

2017-01-26

1,189.70

2017-01-27

1,184.85

2017-01-30

1,192.80

2017-01-31

1,212.80

2017-02-01

1,203.65

2017-02-02

1,221.95

2017-02-03

1,215.20

2017-02-06

1,226.75

2017-02-07

1,231.00

2017-02-08

1,242.10

2017-02-09

1,236.80

2017-02-10

1,228.30

2017-02-13

1,222.25

2017-02-14

1,230.75

2017-02-15

1,224.40

2017-02-16

1,240.55

2017-02-17

1,241.95

2017-02-20

1,237.30

2017-02-21

1,233.20

2017-02-22

1,236.65

2017-02-23

1,247.90

2017-02-24

1,253.65

2017-02-27

1,257.20

2017-02-28

1,255.60

2017-03-01

1,240.40

2017-03-02

1,238.10

2017-03-03

1,226.50

2017-03-06

1,230.95

2017-03-07

1,216.65

2017-03-08

1,209.20

2017-03-09

1,206.55

2017-03-10

0.00

2017-03-13

1,204.20

2017-03-14

1,204.60

2017-03-15

1,198.80

2017-03-16

1,229.35

2017-03-17

1,229.60

2017-03-20

1,232.40

2017-03-21

1,241.60

2017-03-22

1,249.05

2017-03-23

1,247.50

2017-03-24

1,247.50

2017-03-27

1,257.55

2017-03-28

1,257.25

2017-03-29

1,251.10

2017-03-30

1,248.80

2017-03-31

1,244.85

Source: Federal Reserve Bank of St. Louis

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