Come on, hands up who was shocked by the prices at the gold souq last year? You are not alone. Our interview with Jeffrey Rhodes at RAK BANK explains why we felt this
After the twin shocks of the unexpected Brexit vote in the UK and the election of Donald Trump to the White House in the US in 2016 had caused gold to spike almost 30% from $1062 to a high of $1374 before falling back to end at $1151, most pundits, including this author, had expected another year of uncertainty and high price volatility in 2017.
The early signs
The early signs in Q1 seemed to validate that view as gold rose from what proved to be the low of the year of $1146.50 on 3rd January to reach $1265 by mid February as investors sought the safe haven of the yellow metal in reaction to President Trump’s increasingly erratic economic and political comments, and growing concerns in the Eurozone about elections that were due to be held in France and Germany. However, the price snapped back to $1195 in early March as strong US economic data made a rate hike by the Fed a virtual certainty at their March meeting. In a typical ‘sell the rumour, buy the news’ move gold rallied in the wake of the actual 25 basis points increase to reach $1295 by the 17th April ahead of the first stages of French Presidential election with financial markets spooked by the possibility of an extreme right or left wing success. In the event the Centrist candidate Emmanuel Macron swept to a landslide victory, easing geo-political concerns with gold falling back to $1215 in early May only to reverse direction yet again to retest $1295 by the start of June on renewed safe-haven buying following the snap General Election in the UK that ended in a hung Parliament to reignite political uncertainty in Europe.
However technical selling set in as gold failed to break above the pivotal $1300 for the second time in less than two months and when the Fed acted again to raise interest rates by 0.25% on 14th June, the yellow metal fell steadily to reach $1205 by 10th July. We then saw gold stage a major rally over the next two months with the price surging by almost 13% to reach the year’s high of $1257.50 on 8th September on safe-haven buying against a backdrop rising geopolitical tensions in the Korean peninsula, benign US inflation data and the on-going concerns caused by the erratic day to day nature of the Trump Presidency. The steepness of this rally left gold technically vulnerable to a pull back and when the inevitable reversal set in the decline in price went much further than expected, with price falling steadily throughout the first two and half months of Q4 to reach $1235, as another spate of strong economic reports from the US resulted in the Fed hiking rates by another 0.25% for a third time in the year to 1.50% on at their final meeting of 2017.
In the aftermath of the Fed’s move on 13th December gold staged an impressive rally, albeit in ultrathin trading conditions, to end at $1302 representing a solid year on year gain of $151 or 13.12% while the average price of $1258 was within $7 or 0.55% of our prediction of $1265 made last January. Silver, as ever followed gold’s direction throughout 2017 but typically, with its greater beta, exaggerated the yellow metal’s price movements. The industrial precious metal had ended 2016 with an impressive 15% gain at $15.93 and it made a stellar start to the New Year with the price surging by 16% to reach $18.48 on a wave of speculative buying by the end of February before staging an abrupt 9% about turn than saw the price fall back to $16.82 just two weeks later. The decline in price below $17 found willing physical buyers and silver resumed its upward trend to reach a high for the year of $18.64 on 17th April on fresh momentum buying as evidenced by a massive 42% surge for the year to date in open interest on the CME. This was followed by a dramatic 14% fall towards $16 by 9th May on massive liquidation by the short-term players only for the price to recover to $17.75 by early June. The rally was short-lived as the June rate hike by the Fed prompted a fresh bout of liquidation that turned into a ‘flash crash’ on 6th July with the price collapsing to a low for the year of $14.90 (although some charts show the price as being much lower at $14.35 in the prevailing ultra fast markets). Silver then tracked gold higher over the summer to reach $18.20 by 8th September before falling 14% to $15.60 ahead of the Fed’s final rate hike of the year in December. A bout of short covering into year-end saw silver end a highly volatile twelve months up $1.02 or 6.40% at $16.95.
Over 2017 silver’s value versus gold, as represented by the gold/silver ratio fell by 6.31%, whereas Gold’s new-found premium over platinum rose by over 50% to $378 with the noble metal enduring another difficult twelve months to end ‘bottom of the class’ for the second year running.
Platinum actually started 2017 strongly with the price rising by 16% from $900 at the end of 2016 to reach a high for the year of $1044 by the end of February, however this proved to be a false dawn for the platinum bulls with the price steadily declining to reach $890 by early July. The noble metal then tracked gold and silver higher over the summer to briefly reclaim a foothold back above $1000, reaching $1020 by 11th September, only to resume its bear trend in Q4 to post a low for the year of $873 just ahead of the Fed’s rate increase in December. The final two trading weeks of 2017 saw platinum recover to end another largely disappointing year with a marginal $24 or 2.67% gain at $924.
On a much brighter note palladium, so often referred to as the junior precious metal, had a truly spectacular year with the price rising steadily throughout 2017 from a low of $682 at the start of January to reach a 16 year high of $1072 on the penultimate trading day of the year before ending just off the highs at $1061, representing a stunning gain of $382 or 56% year on year gain. This rally has surely confined the term ‘junior precious metal’ to history with palladium reversing a discount of $221 to platinum to a premium of $137, a change in this cross metal spread of 162%.
While many market participants tend to look narrowly at the gold price in dollar terms, we see gold as a wider alternative hard asset to all currencies. It is worth noting that gold in Turkish Lira rose 21.52% with the value of the TRY falling on rising political risk in the aftermath of the failed coup attempt in 2016, while gold in Indonesian Rupiah rose 13.91%, more or less matching gold’s increase in USD. The rising value of the Rouble, INR and CNY in 2017 meant that the increase in local gold prices in Russia, India and China were in the region of 6%, while Australia, the UK and South Africa fared even better with modest gains of 4.64%, 3.32% and 1.80% respectively, reflecting the relative strength of their currencies. The Euro was a standout performer in 2017 following positive political developments in Germany and France that resulted in gold’s value in Euro’s falling by 0.91%.
We also like to track gold’s value against other major assets classes, particularly crude oil given our base in Dubai, and the DJIA as a proxy for global equities. The yellow metal’s purchasing power versus crude fell by 3.52% in 2017, reflecting the 17% rally in oil prices last year, while record-breaking US equities outperformed gold by almost 10%. Despite this gold remains one of the best performing asset classes of this century, bettered only by copper.
A bit more history
While 2016 saw massive investor inflows into the gold ETF space as a result of the two black swans of Brexit and the Trump election, 2017 could be viewed as being disappointing with an increase of just 3.43% increase in total holdings to 55.56 Mio ounces. However, the rising price of gold meant that this was worth $72.21 billion versus $61.72 billion in 2016 translating into a 17% advance in USD terms, with this taking place in the face of record-breaking global equity markets. Silver holdings declined by 3.81 Mio ounces but the value in USD rose by 5.75% to $10.66 billion from $10.08 billion. The falling value of platinum compared to gold and palladium attracted some investor bargain hunting with an 8.10% increase in total holdings while the 56% surge in the palladium price saw ETF outflows of 22.80% as investors took advantage of the increase to book profits.
We also like to look at total open interest in the world’s largest gold futures contract, which is listed on the CME, as a guide to Commodity Trading Advisor (CTA) speculative activity in gold, which is a key short-term driver of the gold price, and it is interesting to note that open interest posted a year on year gain of 13.51% was exactly in line with the increase in the gold price. Another key observation from this data was the fact that open interest in palladium ballooned by 56% also matching the increase in palladium’s value in 2017, suggesting that while palladium’s strong demand over supply fundamentals supported this year’s rally, the key driver has been speculative interest, leaving it vulnerable to a correction in 2018.
Looking at other markets the stand out winner was the US interest rate market with the Fed doubling their benchmark rates from 0.75% to 1.50% last year, while copper was second only to palladium in the metals markets with a 31% increase in value. Global equity markets had a record-breaking year highlighted by the SENSEX, which gained 27.91% and the DJIA rising by 25.08%. Brent crude oil added another 17% to the previous year’s 52% year gain. The Euro posted a 14.11% rally, while sterling recouped 9.53% of the previous year’s sharp losses and the Indian rupee rose 6.06% against the greenback. The dollar, as evidenced by the .DXY, had a bad year falling by almost 10% despite rising interest rates, surging equity markets and a strong economy.
To find out more about the outlook for Gold in 2018, read our article here…