AMEinfo EXPERTS
by Ismail Al Hammadi
Al Ruwad Real Estate


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Top 3 Commodity Trends in January, 2017

January 17, 2017 4:37 pm

Stock Exchange Trading Floor. (Image: Alamy)

* Fueled by Brexit fears, Gold became the best-performing asset in the first half of 2016

* China’s confident outlook will drive other precious metals

* Effects of Trump’s protectionist policies yet to be seen

 

The Federal Reserve’s interest rate hike and Donald Trump’s election victory in December boosted the US dollar. So, considering the inverse correlation between the USD and Gold, it wasn’t a surprise that the precious metal fell at the same time. But it wasn’t destined to last.

Trump’s controversial and combative press conference early January raised eyebrows and sparked economic concerns. Investors who expected signals on Trump’s policies to tackle US debt were kept waiting. But it’s still the $20 trillion elephant in the room.

 

(Unlike GCC sisters,Oman central bank won’t follow Fed’s rate decision)

 

Rising rates

The drop in precious metals in the last quarter of 2016 had lot to do with the increase in real interest rates. Tightening monetary policies gathered amid a belief that Trump will lead a revolutionary change in the US economy.

But when we look at how Trump plans to drive growth, an increase in the national debt is unavoidable. The more debt that’s added to the US economy, the shinier the outlook for precious metals in the long run.

 

Gold makes a comeback

Gold and other precious metals like Silver and Platinum started 2017 on an uptrend. By the end of the second week in January, Gold broke $1,200 per oz as uncertainty made a comeback. We saw a similar trend last year. Fueled by Brexit fears, Gold became the best-performing asset in the first half of 2016. The first six months of 2017 are likely to see echoes of the same Brexit fears.

Prime Minister Theresa May has warned of her plans to trigger Article 50 in Spring. This means that traders have a decent chance to price in GBP and Gold volatility before March. It appears they’re wasting no time in hedging with Gold.

The odds are on the precious metal sprinting the closer the UK gets to its official exit negotiations. The deadline is looming after UK lawmakers demanded that Theresa May set out her post-Brexit plans by mid-February.

Add this political uncertainty to the rise of populism in the Euro area, and there’s a strong case for investors to keep a part of their portfolio in Gold.

Silver and Platinum are tracking Gold’s rise. At the time of writing, Silver is testing $17 per oz and Platinum is heading to $991 per oz. The trend has several drivers. Locking in contracts at the current prices is likely appealing to manufacturers. The sector could be in considerable pain once political uncertainty drives precious metals up.

 

(Gold hits near 4-week high as dollar retreats, demand surges)

 

China effect

The more confident outlook from China and its manufacturing sector is another driver to watch for in the precious metals markets. Commodities like Platinum are used in a wide variety of manufacturing processes.

Vice Finance Minister Zhu Guangyao told investors that China’s GDP reached the 6.7 per cent target in 2016. His confidence soothed fears that the country’s gigantic manufacturing sector was slackening.

But there are new threats to China’s growth in 2017, not least of which is a growing trend of US protectionism.

 

(Trump, Brexit challenges for SMEs in 2017)

 

Trump vs China

Donald Trump is challenging China over its record trade deficit with the US, which hit $367 billion in 2015.  He has also threatened to slap China with a 45 percent import tariff.

The flow of Chinese goods to the US is $485bn per year, close to a quarter of its total exports. So, high US tariffs would have a significant impact on revenues and growth in China.

Trump is resoundingly protectionist in his economic policies, so this is not a threat to overlook.  But at this stage, it’s difficult to price in Trump’s protectionism.

The real reaction in precious metal prices might only start once he is in power and starts a series of concrete policies. If punitive tariffs are levied on China’s imports to the US, exports may drop significantly.

So, unless China has Plan B to develop other markets to replace the US, demand for precious metals like Platinum could fall.

The alternative scenario is that Trump’s threats are empty and China’s growth stays steady, along with the trade deficit and demand for Chinese goods from the manufacturing sector. This would maintain or even increase the demand for precious metals used in manufacturing.

The controversy over China tariffs is likely to support the Gold price though. It’s part of the witch’s brew of political uncertainty prevailing in the US, EU, and UK. Through January and in the near term, I expect Gold to sustain its attractiveness as a safe port for investors.

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Chief Market Strategist for the Gulf and Middle East region at FXTM, and host of the popular evening business show on CNBC Arabia, Bursat  

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