FEATURE OUTLOOK 2017 THE GOLD MARKET


liquidity provider of last resort. In 2016, gold-backed ETFs increased their collective holdings by 536 tonnes (US$21.7bn), the highest since 2009. And while US-listed gold backed ETFs saw a 40% plus reduction in their gold holdings in Q4 2016 - relative to the three previous quarters - UK, Asian, and Continental Europe-listed ETFs fell by just 14%, 9% and 1%, respectively. In all, Europe and Asia accounted for 57% of total ETF flows last year. And the WGC expects that gold investment demand is likely to remain firm.


CURRENCY DEPRECIATION Monetary policy is likely to diverge between the US and other parts of the world. The Fed is widely expected to tighten monetary policy, but it is far from certain that other central banks may be willing and/or able to do so. The situation in Europe is a case point. As John Nugée states:


in


Europe: A year of political uncertainty


John Nugée, renowned economic and geopolitical commentator, expects three trends are likely to dominate Europe in 2017: a continuation of tight fiscal and loose monetary policy; an increase in unconventional economic interventions, and growing divergence with US monetary policy. These are likely to put further pressure on the euro and create rising friction between northern and southern members of the Eurozone.


The main thrust of economic policy in the wake of the 2008-2009 financial crisis has been to avoid a repeat of the 1930s depression. And it has not been unsuccessful. A major post-crisis recession was averted and most economies have returned to growth.


But there has still been a surge of anti-establishment populism, because economic growth has come alongside growing financial inequality. The rich have not only survived the post-crisis austerity but, courtesy of quantitative easing and inflated asset prices, they have done increasingly well. Seen as deeply unjust, voters now worry more about fairness and equity outcomes than economic growth alone. And there is little sign that will change in 2017: A year of elections and political negotiations beckons, against a backdrop of continued citizen unrest, and fuelled by the ongoing uneven distribution of economic welfare.


Gold is especially effective as a safe have during times of systemic crisis, when investors tend to withdraw from risk assets. As they pull back, gold’s correlation to stocks becomes progressively more negative and its price tends to increase. Gold historically performs better than other high-quality liquid assets during periods of crisis and that makes it an excellent liquidity provider of last resort.


“Europe’s economies are likely to face a continuation of the current tight fiscal, expansionary monetary policy as they have for at least the last five years.” Since the European Central Bank announced further quantitative easing measures in January 2015, its balance sheet has increased by approximately €1.5 trillion, resulting in an increase of 70% and bringing the current balance sheet total to more than €3.6 trillion. This will inevitably lead to fears of currency depreciation.


In 2016, gold-backed ETFs increased their collective holdings by 536 tonnes (US$21.7bn), the highest since 2009. And while US-listed gold backed ETFs saw a 40% plus reduction in their gold holdings in Q4 2016 – relative to the three previous quarters – UK, Asian, and Continental Europe-listed ETFs fell by just 14%, 9% and 1%, respectively. In all, Europe and Asia accounted for 57% of total ETF flows last year. And we expect that gold investment demand is likely to remain firm.


Currency depreciation


Monetary policy is likely to diverge between the US and other parts of the world. The Fed is widely expected to tighten monetary policy, but it is far from certain that other central banks may be willing and/or able to do so.


Over the next six months, Europe faces the British invocation of Article 50 (the formal statement of intent to leave the EU), the opening shots in ensuing negotiations and important elections in the Netherlands, France and possibly Italy. The orthodox political class will face further challenges from populist movements and candidates in these electoral battles, and Donald Trump is unlikely to be the last surprise victor in the votes to come. For investors, this suggests a further year of volatility and surprises, as economic concerns continue to be overshadowed by political ones, and deeply held beliefs and long-established systems are challenged.


“[Policy] divergence is likely to lead […] to downward pressure on the euro and pound”


John N gée, frmer Re u o serv


es Chief Mnager Bank of England


a This will inevitably lead to fears of currency depreciation.


In fact, over the past century, gold has vastly outperformed all major currencies as a means of exchange. One of the reasons for this is that the available supply


The situation in Europe is a case in point. As John Nugée states: “Europe’s economies are likely to face a continuation of the current tight fiscal, expansionary monetary policy as they have for at least the last five years.” Since the European Central Bank announced further quantitative easing measures in January 2015, its balance sheet has increased by approximately €1.5 trillion, resulting in an increase of 70% and bringing the current balance sheet total to more than €3.6 trillion.


of gold changes little over time - growing only 2% per year through mine production. In contrast, fiat money can be printed in unlimited quantities to support monetary policies. This difference between gold and fiat currencies can drive


Chart 1: All major currencies have depreciated over the past century relative to gold* Value in gold


100 120


20 40 60 80


0


1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 US dollar Mark**


Reichsmark Deutschemark ECU Euro Yen Pound sterling


*As of December 2016. **The 'Mark' was the currency of the late German Empire. Originally known as the Goldmark and backed by gold until 1914, it was later called Papermark. Source: Bloomberg, GFMS-Thomson Reuters, ICE Benchmark Administration, Metals Focus, World Gold Council


Gold


In fact, over the past century, gold has vastly outperformed all major currencies as a means of exchange. One of the reasons for this is that the available supply of gold changes little over time – growing only 2% per year through mine production. In contrast, fiat money can be printed in unlimited quantities to support monetary policies.


This difference between gold and fiat currencies can drive gold investment demand as investors seek to preserve capital from depreciating currencies, exemplified by European investors last year, when they turned to gold through bars, coins and ETFs. German investors added 76.8 tonnes of gold (+76%) to ETFs in 2016. They also bought 72.3 tonnes through bars and coins between Q1 and Q3 2016 (based on the available data).


But gold’s relative steadfastness can also support central bank demand. To that end, central banks continue to acquire gold as a means of diversifying their foreign reserves and we expect them to continue to do so in 2017.


gold investment demand as investors seek to preserve capital from depreciating currencies, exemplified by European investors last year, when they turned to gold through bars, coins and ETFs. German investors added 76.8 tonnes of gold (+76%) to ETFs in 2016. They also bought 72.3 tonnes through bars and coins between Q1 and Q3 2016 (based on the available data). But gold’s relative steadfastness can also support central bank demand. To that end, central banks continue to acquire gold as a means of diversifying their foreign reserves and the WGC expects them to continue to do so in 2017.


RISING INFLATION EXPECTATIONS


Nominal interest rates are widely expected to increase in the US this year, but all the economists the WGC spoke to forecast that inflation will rise as well.


An upward inflationary trend is likely to support demand for gold for three reasons. First, gold


Outlook 2017 | World Gold Council 48 JEWELLERY FOCUS


03 February 2017 | jewelleryfocus.co.uk


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