Thomson Reuters just published the GFMS Gold Survey: Q3 2016 Update and Outlook. What can we learn from this publication?
The headline is that physical gold demand declined 30 percent year-on-year in the third quarter of 2016 due to sharply higher prices at the start of the quarter in the aftermath of the Brexit vote. This is just another confirmation that physical demand does not drive gold prices, but it is reactive. The more important fact is that the demand for gold ETFs remained healthy over the summer.
But let’s move on to the most interesting part of the report – the price outlook. The authors argue that the recent price fall was a healthy correction for the market. They believe that “it is no more than that with gold set to stay well above last year’s price lows as it continues to comfortably exceed $1,200, with a potential low of $1,240”. Since there is a growing number of financial institutions recommending gold purchases in a world with trillions of dollars of negative yielding bonds, the Thomson Reuters’ analysts forecast gold prices to average $1,420 in 2017.
The authors believe also that the U.S. presidential election may support the price of gold, as it increases volatility. Trump’s victory would send the greenback south and boost gold prices much more than Clinton’s success, not least because she belongs to the same party as the incumbent President. Actually, if she wins, then gold prices could lose some ground as the risk premium vanishes, according to the report. We generally agree, but the impact of geopolitical events, including elections, on the gold market, seems to be overstated. There definitely would be a jump in prices in the case of Trump’s victory, but we are skeptical that it would cause gold to rise above $1,400 or even $1,500, as the GFMS team believes.
To sum up, physical gold demand remained weak in the third quarter of the year. However, the GFMS (just like the WGC) pays too much attention to physical demand, which follows the price dynamics and does not shape it. The impact of the U.S. presidential election is probably also a bit overstressed. Although we agree that the recent fall in prices was rather a necessary correction, and that 2017 should be a good year for the gold market, the GFMS price forecasts seem to be too optimistic right now.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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