- Gold up 21 percent since the start of 2016
- Gold reacts to key US economic indicators
- Gold closely linked to US monetary policy
- Weak Chinese/global growth in first quarter boosted gold
- Geopolitical risks and US presidential election important factors in price movement
XAU/USD – 2016 Review and Forecast
Gold (XAU/USD) has racked up impressive gains of 21 percent in the first half of 2016. Gold may be hard-pressed to repeat this feat in the next six months, but the forecast for gold remains positive, with the metal expected trade in the range of $1300-$1400 at the end of the year.
At the start of 2016, gold was trading at $1060, and has not looked back since that time. Global growth took a hit in the first quarter of the year, as China recorded softer growth and hence weaker demand. This resulted in weaker first quarter growth in the developed economies, notably the US, the Eurozone and Japan. Global markets plunged, and alarmed investors flocked to gold, which provided a safe haven from market turbulence and volatility. Gold prices were up sharply in the first quarter of 2016, climbing close to the $1300 level in March. Gold is also closely linked to market sentiment regarding US interest rate policy. Speculation that the Federal Reserve would raise interest rates pushed gold prices higher, but the metal dropped whenever expectations for a rate hike receded.
Open: $1061.12 (January 1)
High: $1374.79 (July 10)
Low: $1060.54 (January 1)
Close: $1335.97 (August 8)
Gold Expectations for June-December 2016
US Economic Indicators
Key US indicators can have a strong impact on the currency and commodities markets. Gold is no exception, as economic releases which miss expectations tend to cause uncertainty about the strength of the economy and often result in gold prices moving higher. Conversely, strong economic data can lead to investors feeling more comfortable buying risk assets, at the expense of gold, a traditional safe-haven asset. Key releases such as GDP, Nonfarm Payrolls and CPI can have a strong impact on the movement of gold. The US economy softened in the first quarter, and this buoyed gold prices. If key economic indicators show strong improvement, gold prices could soften.
US Monetary Policy
For close to a decade, the US Federal Reserve held rates close to zero. However, that trend ended in December 2015, when the Fed raised the benchmark rate to 0.25%. Gold prices are closely linked to interest rate moves. A rate hike makes the US dollar more attractive at the expense of gold, which offers no interest. Conversely, a rate drop is bullish for gold. The first half of 2016 has been marked by ongoing speculation as to whether the Federal Reserve will raise rates. Statements from Fed chair Janet Yellen and other Fed policymakers are closely monitored by the markets. Statements which are hawkish and hint at a rate hike often push gold lower, while dovish messages from the Fed often boost gold prices. In December, the Fed hinted that it could raise rates as many as three or four rate times this year, yet here we are in June, halfway through the year, with no rate hikes so far in 2016. The most likely dates for the next hike are in July or September, but the Fed is unlikely to make a move if employment and inflation indicators do not show sign of improvement. Given that the Fed is keen not to surprise the markets with a rate hike, and any moves are likely to be only quarter-point increments, the response from gold to a rate hike could be limited.
China is the world’s second biggest economy and a key trading partner for the US, Japan and the Eurozone. The Chinese economy has been contracting for six years and a sharp slowdown in the first quarter of 2o16 had serious repercussions on global markets, as weaker Chinese demand took a toll on the developed economies, notably the manufacturing and export sectors. In a June report, the OECD has forecast that China’s economy will grow 6.5% in 2016 and drop to 6.2% in 2017. Weak Chinese growth will continue to cloud the global economic outlook, and could signal further gains for gold.
Global growth took a hit in the first quarter, as slowdowns in China and developing economies hurt economies around the world. The global economy remains fragile, and the World Bank has reduced its forecast for global economic growth. Last week, the agency revised its forecast to growth of 2.4 percent in 2016, down from the 2.9 percent gain it projected in January. Developed economies such as the Eurozone and Japan are grappling with weak growth and low inflation, while developing economies have been hit by low commodity prices, such as oil. Weak global growth could be a boon for gold, as the safe-haven assets continues to attract investors who have little appetite for risk in these uncertain economic conditions.
Geopolitical considerations play an important role in the price of commodities such as gold. During times of uncertainty or crisis, investors will usually respond by dumping high-risk assets (such as minor currencies) and snapping up gold, a safe-haven asset. There is no shortage of potential clashes in the geopolitical arena. Tensions continue between China and the US over sovereignty claims by China in the South Pacific. Russia and Europe remain at loggerheads over the annexation of parts of Ukraine by Russia, and the ongoing war with ISIS in Iraq and Syria is another hot spot. As well, referendums and elections around the globe add uncertainty and volatility to global markets. Notable events include the upcoming British referendum on EU membership and the US presidential election in November, which could lead to major policy shifts by the US as the Obama years come to an end. At the same time, it should be remembered that more often than not, the markets respond to such events with volatility for only a brief period; this may create opportunities for traders, but geopolitical events are unlikely to have a lasting effect on gold prices, which may spike or drop after a particular event, only to return to earlier levels.