A stronger US dollar has weighed on gold and oil prices
Gold prices offer limited downside. We target $1,200 in 6 months and $1,250 in a year
We continue to see Brent oil trading in a $45-55 range in coming months
Gold. After a strong first half and consolidation in the third quarter, gold prices then tumbled. They were hard hit by a spike in the dollar and US yields following Donald Trump’s election given their negative correlation with real interest rates.
In this context, it is no surprise that gold Exchange Traded Funds (ETFs) suffered sizeable outflows in November 2016 after three consecutive quarters of large inflows.
Although gold could lose further ground in the short term, we see limited downside given:
1. Rising inflation – in the US and elsewhere – and looming political risks should deter investors from reducing their gold holdings too sharply.
2.Among safe-haven alternatives to gold, government bonds remain expensive despite the rise in sovereign yields since the summer.
3. Cheaper gold should lead to stronger demand from emerging market central banks and consumers.
All in all, we see gold prices around $1,200 in 6 months and $1,250 in a year.
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Oil. The post-election rally in the US dollar also pushed oil prices lower. However, the downtrend was short-lived – attention soon returned to the potential for Organisation of Petroleum Exporting Countries (OPEC) production cuts. At an informal meeting in September, after long discussion, OPEC decided to curb its output, subject to ratification on November 30th. In our view, the deal is too small (only 700k barrels/day) to have significant impact. Also, not all countries will agree to share the burden – for instance, Iran, Libya and Nigeria may actually increase their supply.
On the supply side, the US oil rig count has been rising since mid-2016, and Donald Trump intends to support oil drilling activity through a relaxation of environmental rules. The latest Energy Intelligence Group survey shows global oil output at an all-time high of 100.1 million barrels per day in October. On the demand side, global oil consumption is growing, mainly thanks to rising demand from emerging countries.
All in all, we expect demand to catch up with supply gradually but not until the second half of 2017. We still see Brent oil trading in a $45-55 range in coming months.