2016 comes to an end. Now, the question is what the next year will be like?

Let’s outline the most important themes (from the fundamental point of view) for the gold market in 2017:

  • Trump. The economic policy of a new administration will be one of the hottest topics next year. Prepare for strong emotional reactions to Trump’s words and actions, since markets expect radical reforms which would boost infrastructure spending and economic growth. The hype should peak around inauguration or later, when first bills will be passed through Congress. This is why we believe that gold will remain under downward pressure at the beginning of 2017.
  • Fed. Trump’s moves would be very important for the gold market, but the Fed’s response to them may be even more crucial. In some sense, the new president’s impact on gold would be indirect, working through such channels as the Fed, the greenback’s strength and the level of bond yields. The FOMC members now see three hikes in 2017. Take this forecast with a pinch of salt. Given the poor track-record in 2016 and too rosy projections, we are a bit skeptical and believe that the Fed will raise interest rates twice at most. The U.S. central bank would remain very cautious and could want to see what kind of policies Trump will implement before hiking. Over the year, gold’s fundamentals will be strongly influenced by the Fed’s signals and the market odds of interest rate hikes. Hence, the price of gold may be under downward pressure due to the expectations of a Fed hike in June. However, the Fed’s stance is likely to soften over the year, which would be positive for gold.
  • U.S. dollar. From the fundamental point of view, the greenback and U.S. bond yields are the key drivers of the gold prices. Investors should expect an appreciation of the U.S. dollar, perhaps it will even break the parity with the euro. The reason is quite simple: other major central banks are likely to be less hawkish than the Fed. We do not say the Fed will conduct a very aggressive tightening or that the ECB and the BoJ will expand their stimuli, but that the Fed is likely to be less dovish than other big players. Therefore, the strengthening dollar will be a significant headwind for gold prices. However, the ECB and the BoJ seem to be in a ‘wait-and-see’ mode. Hence, they could adopt a more hawkish stance, although – given the economic situation in Japan and the Eurozone – it seems not very likely.
  • Real interest rates. The plunge in gold prices at the end of 2016 was caused mainly by the surge in U.S. real interest rates. If this trend continues next year, the price of the yellow metal will suffer. Trump’s policies may lead to a rise in real interest rates, however the worst may be behind us, especially if Trump falls short of expectations. In such a scenario, we could witness gold’s comeback.

The take-home message is that predicting the future to the letter is impossible. All we know is that 2017 will be a fascinating year for the gold market, with many ups and downs along the way. We also know that the key fundamental drivers of the gold prices in 2017 will be the U.S. dollar, real interest rates, and Trump’s policies together with the Fed’s responses to them. Indeed, Trump is likely to be the hottest theme in the first half of the year, unless of course something unexpected happens.