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Gold Gains 4.6% (and Silver +6.5%) in January
Gold rose from $1,159.10 in the final London close for 2016 to $1,212.80 as of the final close in January, 2017, for a gain of 4.63%. Silver rose from $16.24 on December 31 to $17.29 on January 31 (+6.47%).
Before you extrapolate 5% gains for every month in 2017, bear in mind that gold has often started the year with a bang during the last few years, only to end the year with a “whimper.” In the long view, gold is building a base for its next bull-market surge. So far, gold’s recent low was set on December 17, 2015 at $1,049.40 per ounce, a day after the Federal Reserve raised short-term interest rates for the first time in nearly a decade. The recent bottom ($1,125.70) also came a day after the Fed raised rates, December 20, 2016. As long as gold stays above $1,050 and below $1,385 it remains in a “base building” period. In each of the last three years, gold has risen an average 4.5% in January, with mixed results by year’s end:
The gold market has given investors ample time to get on board and establish a meaningful long-term position through dollar-cost averaging or regular monthly or quarterly (or annual) purchases. If you view gold like an insurance policy, you never worry about the price. Gold is there when you need it, in times of crisis, when most other asset classes are declining in price. Such a time could be approaching….
Uncertainty Under Trump is Boosting Gold’s Price
When it first became apparent that Donald Trump would win the November 8 election, gold soared and stocks tanked until shortly after midnight. That’s when traders realized that a Republican sweep of both houses of Congress, along with about two-thirds of state Governors and state legislatures, might create a new era of pro-business measures, including lower corporate tax rates and fewer senseless regulations.
Those outcomes are still likely, but the headlines have been dominated by controversial executive orders and something quite unfamiliar in Washington, DC – a President acting rapidly and decisively to fulfill his campaign promises. But promises that sounded good on a political stump became rather messy when implemented with decisive strokes of the pen. Deliberation and subtlety are cast aside and raw emotions surface on all sides of some very sensitive issues on a variety of domestic and foreign fronts – all at once.
This uncertainty has pushed gold up, especially after the Inauguration weekend drama and the first 10 days (it seems like 10 weeks) of the Trump Presidency. The January 23 edition of Barron’s’ Commodities Corner quickly reflected this new reality with their headline “Uneasy Times Great for Gold.”
This headline reflects a remarkable turn of events from a previous Barron’s Commodities Corner headline on December 26 (which we profiled in our last posting, on January 20): “The End of a Golden Era.”
The timing of Barron’s’ late-2016 headline about the “end of the gold era” ironically marked the bottom of gold’s year-end price decline, since it was published just a week after gold’s annual low of $1,125.70. Historically, these kinds of “extremist” newspaper headlines tend to accompany market tops or bottoms.
In their most recent gold analysis (January 23), Barron’s summarized the change in sentiment: “Analysts say gold looks ready to stage a comeback as political and economic risks gain renewed attention with the presidential transition.” Of course, that’s what we originally thought would happen – that the unknowns of a Trump presidency would throw markets off balance, and that added level of unrest would help gold.
Sure enough, on Inaugural Day, January 20, Bank of America Merrill Lynch said that they could see the first inflows into gold from private clients in the previous 10 weeks. The $1.3 billion net inflows into the gold market (mostly ETFs and futures) that week, they said, was the largest weekly gain in five months.
Gold has often performed well in the first years of recent Presidents. Barack Obama and Bill Clinton were younger than Trump, but they were similar to him in that they were untested on the national stage. In their first years, gold rose 25.0% and 17.7%, respectively. George W. Bush was also relatively untested before 9/11. Although gold rose slowly during his first year (+0.7%), gold rose the most under his Presidency than any other President except Jimmy Carter (1976-1980), when gold rose from barely $100 to $850.
We don’t know if gold can continue its strong start in 2017. At the very least, we could see another year like 2016, with a strong gold rise most of the year followed by a correction in the later months of the year
Trump Talks the Dollar Down – Helping Gold
One of President Trump’s first statements about monetary trends and trade policy was made on Tuesday, January 24, his second full work day in office, when he told The Wall Street Journal that the dollar was “too strong.” This caused an immediate correction in the dollar. Whenever that happens, gold tends to go up in U.S. dollar terms, so Trump’s short-term bump in the dollar helped the gold price in the short-term.
At the start of 2017, the U.S. Dollar Index stood at 103.10. At the end of January, it slipped below 100, for a 3% decline, which accounts for most of gold’s +4.6% gains during the month. Much of gold’s decline from election day through the end of 2016 was caused by a rise in the dollar index from 97 to 103 (+6.2%). Since gold is universally quoted in dollar terms, the price goes up when the dollar declines.
Longer-term, the dollar has been quite strong since mid-2014, when the U.S. Dollar Index traded at only 80. At today’s dollar index level of 100, the dollar is still up 25% in the last three years, so that explains much of the reason for the decline in the price of gold in U.S. dollar terms since 2015, when it fell 12%.
The Chinese Yuan is also Weak – Spurring Gold Demand
Another weak currency in the new year is the Chinese yuan. Speaking of New Year, China celebrated its Lunar New Year last weekend: The “Year of the Rooster” dawned on January 28. This annual celebration is usually associated with buying gold for gifts or investments, especially when gold trades at bargain prices, locally. As the Chinese New Year approached, Zhang Yongtao, vice chairman of the China Gold Association, said China’s “appetite for gold coins and bars saw sizzling growth last year as consumers increased buying to hedge against a weakening yuan and a number of ‘black swan’ events, such as Brexit and Donald Trump being elected as the US president.” In 2017, China’s demand for gold in jewelry 19%, but gold investment demand for gold bars rose 28.2% and demand for gold coins rose 36.8% in 2016.
Most investors aren’t aware that China has been the world’s #1 producer of gold over the last 10 years running. They have also become the #1 gold consumer for the last two years, since the Indian government can’t seem to stop making big mistakes when they attack their domestic gold dealers and consumers with taxes, import duties and a controversial and disastrous currency recall last autumn. In previous years, India was the world’s #1 gold consumer, but they are not likely to return to that lofty title any time soon.
China is the new Rooster in the golden hen house, as exemplified by recent statistics on Chinese demand: China imported 158 metric tons of gold from Switzerland in December – over five times as much gold as they imported from the Swiss in November and the most gold China imported from Swiss refiners for any month since January 2014, according to the Swiss Federal Customs Administration. The total gold exports from Switzerland to China reached 442 metric tons last year vs. 288 metric tons in 2015.
The Eurozone May Collapse Soon – Sending Gold up in Euro Terms
The uncertainty in political markets is not limited to America. We’ve already seen the impact of Brexit in Europe, but Britain is not part of the euro currency zone. What if some Eurozone country votes to leave the European Union? That would probably spell the end of the euro as a dominant continental currency.
European voters are in the same mood as Americans about electing a populist leader. This spring there will be elections in France and the Netherlands, then Germany (and maybe Italy) in the fall. These are the most influential nations in the Euro-zone. The first European election this year is scheduled for the Netherlands on March 15. The right-wing nationalist Party for Freedom is currently leading the polls. Next, tthe French election (April 23, with a potential run-off on May 7) also features a populist (Trump-like) candidate, the National Front’s Marine la Pen. She is currently leading in the French voter polls.
Germany’s election is slated for September. If the populists win in France and the Netherlands, that may be an early sign for a similar populist uprising coming in mighty Germany. Either way, the rising political concerns in Europe since Brexit are fueling a European gold rush, mostly in gold coins and ETFs backed by gold. In the week of January 16-20, for instance, Germany’s Xetra-Gold ETF added $544 million in gold-backed ETF sales, which was over 10 times the inflows to America’s SPDR Gold Shares (GLD), the world’s biggest gold ETF, during that same week, according to the Toronto Globe and Mail.
Putting all these trends together, we are liable to have another positive year for gold – maybe about 10% gains (depending on your currency of choice), but that will likely be much better than you can perform in any cash-like or interest-rate-sensitive investment (like bonds or savings accounts) over the coming year.