Gold: End of the golden age? - Natixis

Bernard Dahdah, Research Analyst at Natixis, expects mildly bearish outlook for gold where it is expected to average $1,150/oz for 2017.

Key Quotes

“Pressure:

• Natixis sees three more US rates hikes in 2017, which is one more than the market expects.
• In September, we expect the ECB to announce tapering which would start in January.
• Chinese demand for gold is expected to remain weak. In an effort to reign in capital outflows (trying to boost currency and protect FX reserves), since the last quarter of 2016, China has restricted gold imports (on occasions). Total imports of gold from HK dropped by 13% yoy in 2016 to 668 tonnes (lowest level since 2012).” 

“Support:

We expect marginally lower global mined production in 2017. For the first time in at least a decade, mined supply was flat in 2016, peaking at roughly 3,236 tonnes. Chinese mined gold output also slowed down for the first time in a decade, rising by only 3.43 tonnes to 453.48 tonnes. Producers started sharply cutting CAPEX in 2012, it usually takes 5 years from when a drop in long term investment takes place to when mine supply starts dropping.”

“2018 General View: Mildly Bearish (avg $1,070/oz)”

“Pressure:

• Natixis sees three US rate hikes in 2018.
• We see ECB tapering starting in January, from $60bn to $40bn and in March at $20bn. We would expect tapering to end in June.  
• First ECB deposit rate hike end of 2018 and repo early the year after. 
• Initial boost in the US economy from Trump's economic plan is expected in 2018.
• Outflows from physically backed ETPs on the back of European tapering and end of year rate hike.”  

“Support:

• Lower gold mined output on the back of low capex in the period 2012-17. Low gold prices also not providing an incentive from ramp-up in production.
• As with 2017, Central bank additions not very active (but not net-selling), mainly dynamic hedging. Potentially more interest in gold leasing as LIBOR rises and lower gold prices stimulate demand (lower GOFO rate).” 

“2019 - Onwards General View: Bullish inclination”

“Support:

• Does Trump's economic plan start faltering at some point in 2019? Leading to higher inflation than expected and a weaker dollar especially if he does adopt a more protectionist stance/currency wars.
• Further drops in mined gold output, due to the low capex spend in the period 2012-17.
• A return in Central bank demand for gold from emerging countries if the US dollar weakens sharply. 
• Does India cut tariffs on gold imports?”