Gold Fundamentals Stronger Today Than When Gold Reached Record Highs - Zulfiqar

Release Date: 
Friday, January 27, 2017

Gold prices drifted lower this week despite disappointing economic news regarding fourth quarter GDP.

“After a knee-jerk rally, gold has been unable to hold its gains, falling to session lows despite data showing economic growth in the U.S. ended the year on a soft note. Friday, the Department of Commerce said that fourth-quarter advance U.S. gross domestic product expanded by 1.9% in the third quarter, down from 3.5% growth reported in the third quarter and much weaker than expectations…

“Positive for the gold market, inflation appears to be picking up. The Price Index for fourth-quarter GDP rose by 2.1%, in line with expectations….” (“Gold Unable Rally Following Weak Q4 GDP Growth,” Kitco News, 1/27/17.)

Gold ended the week down $18.70, closing at $1,192.30. Silver prices closed at $17.22, up $0.06.

Gold Fundamentals Stronger Today Than When Gold Reached Record Highs - Zulfiqar
Research analyst Moe Zulfiqar believes a “perfect storm” is brewing to send gold prices soaring based upon global and domestic fundamentals.

“Gold prices are setting up to reward investors big-time, and there could be killer profits made in the midst of it. Investors falling for the noise against the precious metal could be making a big mistake…

“This has been said over and over again in these pages; when looking at gold prices, think global. Don’t just think of the precious metals in U.S. dollar terms. In fact, one could call gold a true global currency.

"With this, understand that the fundamentals of the gold market are now stronger than they were even when gold prices were hitting their highs in 2011.  This is going to sound bold, but we have a perfect storm in the making for gold prices: the demand for the metal could surge, and the supply side remains anemic.

“Investors must ask: what happens if the euro hits parity against the U.S. dollar? Will investors in the eurozone just let it happen or will they seek safety? Chances are, they could be rushing to the precious metal if they haven’t already, and this could send gold prices through the roof.

“How about in India? The Indian government, not too long ago, banned the use of its most circulated notes, saying it wanted to end corruption in the country. Those who had cash on hand, all of sudden found themselves with something that became worthless in an instant. Gold has value …

"But, don’t just stop here. In the U.S., the new federal administration is challenging a lot of things. This could cause even more uncertainty around the globe. For instance, during his campaign for the top office, President Donald Trump talked about how he could make major changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Understand that repealing this could give an instant boost to the financial sector, but it could also create the same sort of problems that led to the financial crisis of 2008–2009. Saying the very least, this is going to be great for gold prices….” (“Gold Prices: As Demand Soars, This Sector Could Deliver 100%+ Gains,” Lombardi Letter, 1/25/17.)

Investors Should Guard Against Stealth Inflation With Gold – BlackRock
Russ Koesterich, Portfolio Manager for the world’s largest publicly traded investment management firm, BlackRock, is advising investors to include gold in their portfolios as protection against “stealth” inflation.

“Like the proverbial frog that does not notice the rise in water temperature until it’s too late, investors seem to be experiencing a similarly stealthy rise in inflation. Changes in headline inflation measures suggest a gentle firming in prices. However, underneath the surface there is evidence that inflation may continue to rise past the steady 2% nirvana that central banks prefer.

“Consider the following: Housing costs are now rising at the fastest pace in nearly a decade… Medical inflation is not as contained as many had hoped… Wages are rising… Consumer inflation expectations are also starting to tick higher.

“None of this signals ’70s style inflation; it does suggest inflation may surpass still modest market based expectations… To the extent realized inflation and inflation expectations continue to rise, investors may want to consider several themes in their portfolios … Finally, should inflation expectations rise faster than nominal rates, gold is likely to continue to merit a place in most portfolios.” (“Inflation comes skulking back,” BlackRock Blog, 1/26/17.)

Political And Economic Risks To Rally Gold – Barron’s
“Gold is starting to regain its luster in the new year, reversing a long string of losses following the U.S. presidential election. The precious metal came under pressure after the election of Donald Trump prompted a rally in the dollar, U.S. stocks, and riskier financial assets … However, analysts say gold looks ready to stage a comeback as political and economic risks gain renewed attention with the presidential transition… ‘The world marketplace is getting a bit anxious,’ said Jim Wyckoff, senior analyst at Kitco Metals, in a Wednesday note…

“Comments from Trump helped support gold Tuesday, after he told The Wall Street Journal that the dollar is ‘too strong,’ sending the currency lower. A strong dollar has hurt gold prices in the past couple months, since gold is priced in dollars and becomes more expensive to foreigners as the U.S. currency rises.

“The annual world economic forum in Davos, Switzerland, also highlighted challenges in globalization and trade, according to James Steel, head precious-metals analyst at HSBC in New York. Expectations for slowing global trade may help push gold higher, he says. The investor enthusiasm that pushed stocks up on hopes for economic growth and stimulus has tempered in the new year, and some see that as a bullish sign for gold. The metal is often viewed as a haven asset by investors and is in high demand in times of uncertainty and risk-off sentiment…

“Meanwhile, gold has gotten a boost from bargain hunters in the new year. Asset allocators have had renewed interest in the metal, says George Gero, managing director at RBC Wealth Management, driving total positions higher. In a Friday report, said precious metals saw the first inflows in 10 weeks from private clients, of $1.3 billion, the largest weekly amount in five months…

“Bart Melek, head of commodities research at TD Securities, says doubts over U.S. growth prospects could slow the pace of rate hikes this year: ‘The Federal Reserve is going to be very cautious of how it approaches monetary policy.’ Gold will also benefit if Trump’s plans to boost infrastructure spending and economic expansion fail to materialize. “The political reality is, I think, a little bit less robust than the market predicted,” says Melek. That could translate into more gains for the metal.” (“Gold Can Shine in Uneasy World,” Barron’s, 1/21/17.)

Hedge Fund Bets $313M That President Trump Is Good For Gold
Troy Asset Management’s flagship fund, Trojan Fund, owns $313 million in gold bullion believing President Trump’s policies are positive for gold.

“Sebastian Lyon, whose Troy Trojan fund owns £250 million [$313 million] worth of gold bullion, has asserted that the presidency of Donald Trump will be good for the gold price.

“Lyon has long held an investment in gold, but has seen the value of the precious metal suffer in recent months, as investors take the view that Trump’s policies will lead to a stronger dollar, and that is bad for gold. He said, ‘Gold bullion has been seen by many as a laggard in 2016. A number of investors have asked why it has been so dull. In the last three months of 2016 gold fell by just over 12 per cent. Yet set in the context of the year, gold paid its way, rising by 8.6 per cent in dollar terms, and up 29.7 per cent in sterling terms.’

“The market presently anticipates that Trump’s policies will lead to rising inflation, and rising interest rates. Lyon takes the view that if Trump’s policies do lead to higher inflation, that will be a positive for gold, as gold has the capacity to hold its value. He added that if the policies don’t lead to inflation, then the likelihood is that deflation will take hold, and the dollar would weaken. That could be a positive for the gold price …

“But if Trump’s policies fail to deliver the inflation that is the goal, then rates won’t rise, and that is likely to keep the value of the dollar, and bond yields, low. The Troy Trojan fund has returned 86 per cent over the past decade.” (“Why Trump’s policies are good for gold, by investor with £250 million worth,” What Investment, 1/26/17.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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