Gold between 1100 and 1300 USD, potential boost from Brexit, elections and Trump

Gold prices were up 8.6% in Q1 2017, and now seem to be consolidating in the USD 1200-1250 range.

As expected, the US central bank raised interest rates by 25 bps at its March FOMC meeting, confident in the strength of the employment market, with the workforce nearly fully employed, and the firmness of economic activity (based i.a. on Q4 GDP and consumer confidence).

The minutes of the 14–15 March FOMC meeting, released on Wednesday, not only reiterated that future hikes will be “gradual” – with probably two more this year (in June and September) – but also suggested that the Fed expects to start trimming its balance sheet later this year or in 2018 “in a passive and predictable manner” by phasing out its investments in Treasuries and/or agency MBSs, should the economic conditions allow it.

The Fed also highlighted that it is waiting for more clarity regarding the Trump administration’s fiscal policy. Some Fed members, including New York Federal Reserve President William Dudley, suggested that the Fed might reduce the pace of its rate hikes, or even suspend them, while it focuses on reducing its balance sheet, as it would be “a substitute for rate hikes”. Gold proved pretty impervious to this further monetary policy tightening signal, and Treasury yields barely moved.

The ECB’s meeting minutes, on the other hand, showed that the EU’s central bank has decided to maintain its accommodative monetary policy for the time being. The market had anticipated hints of an earlier stimulus wind-up than initially expected, but the Governing Council declared that the “policy normalisation…would become warranted in future” if the economy continues to show signs of recovery.

Obviously gold, like Treasuries, is caught between strong economic data and political uncertainty. There are continuing uncertainties surrounding the Trump administration’s promises of greater fiscal stimulus (tax cuts and infrastructure spending) and their impact on the economic outlook. The Obamacare reform failure is quite a setback as it casts a shadow of doubt over the Trump administration’s ability to deliver on its promised pro-growth policies.
We are maintaining our prudent view on gold, believing that it will probably remain range-bound, between USD 1100 and USD 1300; however, we are not ruling out the possibility that bullion could get a boost from a variety of factors in the coming months, such as the progress of Brexit, the elections in France and Germany, and Trump’s policies as mentioned above.

Gold could also find support from safe-haven demand due to increased geopolitical tensions; the metal usually barely reacts to such events (unless they hit a financial centre), but after North Korea’s repeated missile launches and Trump’s military threats against Syria after the recent chemical attack there, the situation could heat up.

Névine Pollini – Senior Commodities Analyst – Union Bancaire Privée (UBP)