Gold benefiting from political uncertainty, risk aversion

Friday, May 19, 2017

Gold has gained ground in 2017, from a sub-US$1,130/oz low in December to a brief spell above US$1,280/oz in April, with prices currently trading around US$1,250/oz.

The metal has benefited from global political tensions, partly due to the actions of US President Donald Trump, leading to risk-aversion among investors and a weaker US dollar, Scotia Capital director of gold and precious metals Trevor Turnbull tells BNamericas.

While recent weakness has stemmed from expectations of a June interest rate hike in the US, gold has risen in the wake of the most recent rate increases, he added.

The yellow metal could also be spurred higher by rising inflation over the coming years, with silver also likely to benefit from future industrial demand growth.

BNamericas: What are the main factors affecting the gold price?

Turnbull: Up until recent days the gold price wasn't doing a whole lot, and it seemed like the next catalyst was to see what became of the Federal Reserve interest rate hike in June.

Everyone is pricing a rise in, and it's really more of a confirmation people are looking for.

Gold has been soft since the last Fed comment a few weeks ago, when they reiterated that they will raise rates in June.

There is some debate as to whether as you get to the moment of the hike you start to get a bit of a lift.

We have seen that on a couple of previous rate hikes, when gold was a bit soft going into it and then started to move a bit higher after. That's entirely possible.

In the near-term, everything has been impacted by events in Washington, with the volatility index up and the US dollar weaker.

This all seems to be directly correlated to uncertainty over policy coming out of Washington.

I don't mean economic policy so much as people wondering, what's next?

And obviously the gold price has reacted to that volatility and risk aversion people are experiencing, and the dollar being a bit weaker doesn't hurt the gold price either. It's really as simple as that.

BNamericas: What price do you see for the remainder of the year?

Turnbull: We have forecast a fairly quiet few months, at US$1,200/oz in Q2-Q3 with a bit of a kick in the fourth quarter to US$1,250/oz.

We are not looking for big changes in the gold price. Certainly prices are starting to average better than our forecasts. We didn't count on quite this degree of risk aversion among investors.

The other interesting thing is ETFs on the gold side. 

A lot of people are happy to invest in gold. The metal has performed okay, and some of the gold equities have not, and people feel there is too much additional risk, such as operational and management risk, in gold equities, so maybe it is better to just own gold and be done with it.

Gold has benefited in a number of different ways we didn't fully anticipate at the beginning of the year.

BNamericas: What are your longer term predictions?

Turnbull: We jump up to US$1,300/oz next year and stay flat after that. That's predicated on the slow but steady creeping in of inflation.

BNamericas: What about silver?

Turnbull: Silver has always been something that you will start to see doing better, in terms of the ratio between gold and silver coming down, when base metal demand picks up.

We are looking for silver at US$17/oz in 2017, US$18.50/oz in 2018 and US$20/oz long-term, with the gold:silver ratio gradually creeping down, indicating stronger base metal demand.

When you need more copper you tend to need more silver in your applications as well. That's the difference.

About the company

Canada's Scotiabank is a provider of financial products and services to the global mining industry and a major lender to the mining sector in North America.

The company has mining professionals throughout Latin America, including in Peru, Chile, Brazil, Colombia and Mexico.