Two weeks ago, the London Bullion Market Association released a new edition of its annual Forecast Survey. What does the new LBMA Forecast Survey say about the price of gold in 2017?
Gold Prices Will Increase
In this edition, analysts are bullish across the board for all four metals. They forecast that the average gold price in 2017 will be 5.3 percent higher than the average price in the first half of January 2017, which was $1,181. However, the report was published on January 31, 2016, when the price of gold stood at $1,213, so the remaining upside potential may be overestimated. However, investors should be aware that experts predict the average price, not the final price at the end of the year.
The contributors also expect a rise of 7.1 percent for silver prices, 4.9 percent for platinum and just 2.4 percent for palladium. It means that experts are more bullish on the prospects of gold and silver and less bullish on platinum and palladium than they were last year. Regarding gold, contributors predict that the price of gold will average $1,244 in 2017. Although it is a bullish forecast predicting a rise from January levels, it actually implies a slightly lower average price than in 2016, which was $1,251 (all prices are based on the LBMA Gold Price P.M.).
What Will Be the Drivers of Gold Prices in 2017?
On the upside, analysts mainly cite geopolitical uncertainty: a more nationalistic U.S. president in power, tough Brexit negotiations, elections in France and Germany and the risk of tensions between the U.S. and China (or Iran). On the downside, contributors point out the anticipated three U.S. rate hikes in 2017, a stronger U.S. currency and rising stock prices.
Please note that for precious metals, geopolitical risks contribute to the upside, while the macroeconomic outlook adds to the downside. Although in the short term, gold acts as a safe-haven against geopolitical risks, it is macroeconomics which sets the long-term direction for gold prices. Last year, the price of gold was supported before the Brexit referendum or the U.S. presidential election, but we saw a correction in the aftermath of these events. This is why we believe that the annual outlook for gold is at the mercy of risk appetites, the Fed policy, Trump’s actions, the U.S. dollar and real interest rates rather than geopolitical uncertainty.
Surely, there is a risk that the new U.S. administration will widen the federal budget deficit or that inflation will get out from control. In such a scenario, perhaps combined with greater trade protectionism and geopolitical tensions, gold could shine. However, the expectations of fiscal stimulus may support the U.S. dollar and real interest rates, which will be significant headwinds for gold, at least in the first half of 2017. The bull market in bonds may be over, and opportunity costs for holding gold are on the rise. And unlike last year, the U.S. and Chinese economies look a bit healthier, which means that the Fed has no excuse to not hike at least two times.
Conclusions
The key takeaway is that the LBMA released its annual forecasts for precious metals prices. The contributors expect an increase of 5.3 percent for gold prices from mid-January, based on the idea that geopolitical uncertainty will boost the safe-haven demand for gold. However, the forecasted price is lower than in 2016, due to the negative macroeconomic outlook for the yellow metal. Which factors will prevail? We bet that macroeconomics is more important in the long term, so the Fed normalizing monetary policy, the end of negative yields and the stronger greenback will outweigh geopolitical risks, although we will see many ups and downs in 2017. The LBMA Survey is definitely worth reading with many interesting opinions, however, investors should always remember that forecasting is very difficult, especially now when the markets are increasingly driven by political events, which are often impossible to predict. And historically speaking, LBMA forecasters were usually wrong, being either too bearish or too bullish.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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