Researcher BMI Research, a unit of the Fitch Group, has revised down its gold price forecasts for 2017-2018 following the election of Donald Trump as US president.It now forecasts an average of USD$1 300/oz in 2017 compared to its previous forecast $1 400/oz.
Looking further ahead, rising inflation pressures will drive a rebound in gold prices and BMI has left its bullish forecasts for 2019 and beyond unchanged.
Short-term view (three-to-six months)
The victory of Republican candidate Donald Trump in the US presidential election on November 8 catalysed a sharp decline in gold prices and we see limited room for a rebound over the coming weeks.
Global bond yields have broken higher and look set to continue gaining as market expectations for economic growth, inflation and interest rates are re-priced for a Trump presidency.
Specifically, both nominal and real interest rate expectations look set to rise further as a result of expectations for a significant US fiscal stimulus package beginning in 2017.
Rising rate expectations are a negative for precious metal prices given that higher rates reduce the attractiveness of holding non-yielding investments.
In the event that gold prices break below key support around $1 200/oz, BMI would not rule out a temporary overshoot down towards $1 050/oz.
Rising inflation and political brinksmanship to eventually boost gold
BMI expects three factors to drive a rebound in gold prices by the end of 2017.
First, it expects inflation expectations to continue rising over 2017 and for this to reignite investment demand for precious metals. Not only will a persistent rise in inflation expectations keep a lid on real yields, but BMI expects it will become increasingly clear that the risks to inflation are stacked to the up side.
The main upside risk to inflation stems from the fact that fiscal stimulus will coincide with the late stage of the US economic cycle and the concurrent tightness of the labour market. Before Trump's election victory, the researcher was expecting a 'stagflation-lite' scenario in developed markets , whereby rising inflation outstripped weak economic growth.
While impending fiscal stimulus means that a US growth slowdown is now unlikely over 2017-2018 , it has also cemented a positive trend change in inflation expectations.
Second, BMI expects monetary policy in developed markets outside the US to remain accommodative, particularly in Japan and the Eurozone.
Persistently loose monetary policy in major markets outside of the US will slow the trend of rising global real yields. For instance, although inflation pressures will rise in Japan, we expect the Bank of Japan to refrain from significant rate hikes so as to avoid creating a prohibitive public debt servicing burden.
Third, although Trump's policy platform is unclear at this stage, we expect extensive use of political brinkmanship, particularly with regards to foreign policy.
Such an approach will increase risks to economic growth and security and will thus sustain underlying demand for gold as a safe haven as set. For instance, we expect Trump to take a tough stance towards trade relations hips with NAFTA members and China.
It is possible that a resulting surge in US tariffs could threaten the existing global international trade order and significantly weaken the global growth economic outlook.
Risks to price outlook
Upside - The main upside risk for gold prices is that the US Fed falls behind the curve on inflation, possibly resulting from political pressure from Washington to maintain easy monetary policy.
This risk is most relevant in 2018 and beyond given that Trump has stated that he intends to replace current Fed Chairperson Janet Yellen at the end of her term in February 2018.
Trump has shown interventionist tendencies that could prevent a tightening of monetary policy despite fiscal expansion and rising inflationary pressures.
Downside - The major downside risk to our price forecasts is that fiscal stimulus measures in the US pass swiftly through Congress and the resulting upswing in economic growth encourages to Fed to accelerate interest rate hikes significantly.
The fact that Janet Yellen's tenure as Fed chairperson could end in February 2018 makes this a particularly salient risk, as Yellen may wish to decisively contain rising inflation expectations before leaving office.
This risk is thus most relevant to 2017. A significantly more hawkish Fed would be a negative for gold and could push prices back below $1 000/oz.