Gold To Rise On Inflation, Negative Interest Rates – Incrementum

Release Date: 
Friday, March 31, 2017

Gold posted its third consecutive gain this week, causing the quarter to also end in positive territory.

“Gold has recorded a strong gain in the first quarter of 2017, with prices for the precious metal rising around 8 percent. This is the biggest quarterly gain since the first quarter of 2016, when the price rose around 16 percent, according to data from ICE Benchmark Administration Limited. In fact, gold prices have made positive gains in 8 of the last 10 first quarters. One of the main reason for gold's gains is volatility hitting other assets…” (“Gold marks its 8th first quarter gain in 10 years,” CNBC, 3/31/17.)

Gold ended the week up $6.30, closing at $1,250.20. Silver prices closed at $18.33, up $0.49.

Gold To Rise On Inflation, Negative Interest Rates – Incrementum
Ronald Stoeferle, managing partner at Incrementum AG and one of the most-accurate among the precious-metals forecasters tracked by Bloomberg, sees gold rallying up to $1500 in 2017 as global inflation rises.

“Gold is poised to rally to levels last seen four years ago as rising inflation and negative real interest rates combine to boost demand, according to Incrementum AG, which says that the precious metal may be in the early stages of a bull market.

“Prices may climb to $1,400 to $1,500 an ounce this year, said Ronald-Peter Stoeferle, managing partner at the Liechtenstein-based company... investors are on alert for signs of faster inflation, with the Federal Reserve’s preferred gauge jumping recently to near the bank’s target…

“Bullion is traditionally regarded as an effective hedge against rising inflation, gaining in value to help holders preserve their wealth. While higher U.S. rates typically buoy the dollar and can hurt bullion, the commodity has advanced during previous hiking cycles. Trump’s recent talking down of the greenback’s strength should also be positive for gold, according to Stoeferle…

“Not everyone is bullish. Societe Generale SA recommends selling on rallies as it sees gold declining amid further tightening by the Fed and only limited impact from political events… ’Inflation is picking up,’ said Stoeferle, citing what he termed monetary inflation as well as rising assets such as equities, and prospects for price inflation. ‘We’re seeing a pick-up in inflation all across the globe. We’re seeing it in the U.S., where basically every inflation indicator is constantly rising and making new highs. We’re seeing it in Europe, we’re seeing it in Asia.’” (“Gold Set to Soar to $1,500 as Inflation Makes a Comeback,” Bloomberg, 3/28/17.)

Gold Has Impressive First Quarter
Kitco contributor Gary Wagner wrote that gold prices had an impressive first quarter gain of approximately 9%.

“It may be hard to believe, but the first quarter of 2017 is quickly coming to an end. With only a couple of days left in March, it seems likely that gold prices will score a solid gain in terms of their first quarter performance.… Assuming gold prices finish in this area on April 1st, the first quarter performance of the precious yellow metal is roughly 9% …

“Historically speaking, the first quarter of this year and last year have both resulted in solid positive gains. The final puzzle piece that market technicians are looking for is whether or not gold will trade to a higher high than last year’s high. If so, there will be strong technical evidence that an absolute bottom in gold pricing was achieved in December 2015, and the extended massive correction is over…

“Uncertainty surrounding Brexit and a new American president coupled with an accommodative Fed have been supportive of gold pricing this year. Although first quarter performance is dwarfed when we compare it to the first quarter performance of last year, the 9% gain is absolutely respectable. More importantly is the fact that since gold began its most dramatic decline in history, the first quarter performance of last year and this year are strong, solid and indicate a real potential for gold prices to extend their gains throughout this calendar year.” (“Gold Scores An Impressive First Quarter,” Kitco, 3/30/17.)

UK’s Brexit To Benefit Gold – NASDAQ
Nasdaq contributor Martin Tillier wrote that UK’s commencement to formally withdraw from the EU will likely benefit gold prices.

“Today is an historic day for the nation of my birth. Nine months after the surprise referendum vote to leave the European Union (EU), the U.K. Prime Minister Theresa May signed Article 50 of the E.U Charter, formally beginning the withdrawal from Europe, or Brexit as it has become known… There is, however, one market that could benefit as negotiations get underway and that is gold.

“Gold is technically a commodity, but unlike most commodities it has very little practical use. It is therefore more accurate to think of the yellow metal, not as a commodity but as a currency, and it is in that role that gold stands to benefit from Brexit… In effect, foreign exchange is a massive pool of money looking for a home and if just a fraction of that cash finds its way into gold the precious metal is in for a strong bullish run.

“There are a couple of reasons that that outcome looks likely, but they are more to do with the unattractive nature of the alternatives than any particular attraction of gold per se…  Given the lack of choices, therefore, it looks likely that traders will turn to gold in its traditional role as a store of value and an inflation hedge. In fact the chart above would suggest that that process has begun already, as gold has risen as the dollar has retraced since December. That upward trend is likely to be confirmed over the next few months as Brexit moves from a concept to a reality and money looks for a safe home in anticipation of disruption, so introducing gold to your portfolio or increasing current holdings looks like a smart move for investors.” (“Why Brexit Makes Gold A Buy,” Nasdaq, 3/29/17.)

Gold To Resume Role As Productive Portfolio Diversifier – Sprott
Trey Reik, Senior Portfolio Manager of the Sprott Institutional Gold & Precious Metal Strategy, wrote that the Federal Reserve’s planned interest rate hikes will bolster gold’s prominence as a portfolio diversifier.

“Since the turn of the millennium, as the intrinsic value of U.S. economic activity has been declining, the valuation of U.S. financial assets has been levitated by the easy-money policies of the Greenspan-Bernanke-Yellen Feds. As the U.S. economy has been generating less and less quality growth and savings, valuations of financial assets should have been declining, yet the Fed has interceded and intentionally fostered financial-asset inflation…To us, the only question is which asset class will bear the greatest readjustment burden in coming years. As is always the case in assessing gold’s investment merits, critical variables are significantly long-term in nature… [G]old has provided unparalleled portfolio protection as over-exuberant faith in U.S. financial assets has been punished. Should the Fed’s recent shift in rate-hike urgency prove to be motivated by concern for stretched valuations of U.S. financial assets, as we suspect, it will be interesting to see just how far the Fed will go to press its message. We have long suggested the Fed’s reticence to raise rates has reflected concern for the instability of excessive U.S. debt loads, and now the Fed may finally be forced to raise rates out of concern for the instability of excessive U.S. equity valuations. Our long-term expectation of a “rock and a hard place” may be the immediate reality in which the Fed now finds itself. If so, gold’s role as productive portfolio diversifier is about to reassume center stage…

“Should the Fed have the temerity to push fed funds along the confines of their most recent dot plot (three hikes in 2017, followed by three more in 2018), we would expect immediate upticks in default rates across a wide spectrum of sketchy components of the U.S. $66 trillion credit-market debt pile. In an environment of long-overdue debt rationalization, we would expect gold’s traditional profile, as a portfolio asset immune to both default and debasement, to garner significantly renewed investor enthusiasm.” (“Sprott Precious Metals Watch, March 2017 - Trey Reik,” Sprott’s Thoughts, 3/2017.)

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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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