Financial outlook 2017: gold and oil

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Gold to test the lows of 2015

Gold had a very mixed 2016. After an impressive first half of the year where it gained 30% in value, it lost most of those gains in the second half. With the important technical level of $1.160-1.170/ounce breached, gold has now moved into a medium-term downtrend – a move that gained momentum with the election of Donald Trump. The rationale behind this is the potential for fiscal expansion to drive growth and real rates higher, which in turn would make gold a less attractive investment.

So what’s in store for gold in 2017? Three key factors look set to drive price movements: political risks, fiscal expansion and real rates.

Political risks
With an unresolved refugee crisis and terrorist attacks across Europe, the risk of rightwing parties gaining power and causing political instability is rising. Moreover, the war in Syria, the geopolitical role of Russia, recent developments in Turkey and the political inexperience of Donald Trump could spread fear that drives gold investment.

Fiscal expansion
During his presidential campaign Trump promised large-scale fiscal stimulus and considerable infrastructure investments that would support broad and sustained economic growth in the US. This is likely to provide a boost for US companies and make investments in gold less attractive. However, much will depend on the extent of the measures Trump carries out.

Real rates rising
At its December meeting the FED announced its only rate rise of 2016, and predicted three further rate increases in 2017. If rates rise higher than inflation, expect to see further pressure on gold.

From a technical point of view, the break of the 1.160-1.170 support could trigger a drop to the lows of $1.050/ounce we saw in 2015. Much, though, will depend though on the above-mentioned factors. Should fiscal expansion in the US be lower than expected and/or real rates aren’t rising then the outlook for gold will be bullish, with a target of $1.300/ounce.

 

Oil to stabilise above $50
 

The market has waited 15 years since the last coordinated production cut by both OPEC and non-OPEC producers. The agreed cut of 1.2m bbl/d for OPEC and 600,000 bbl/d for non-OPEC countries will come into effect on 1 January for a period of six months, after which the situation will be reassessed.

The psychological impact alone of seeing producers proactively manage the oil supply should keep prices well supported above $50. The market will be observing closely how each country follows the agreed levels, which might lead to some price volatility.

The targeted reductions are ambitious and how they are reached remains to be seen. Even some cuts in production will be more than welcome and will ultimately bring the supply and demand picture into more of a balance.

As oil inventory normalises, we would expect oil prices to gain positive momentum to reach $60 or higher sometime during the year. However, technological advancements, especially in the shale oil industry, continue to drive the production cost lower, making triple digit oil prices highly unlikely.

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