To say that 2016 was a roller-coaster year for the gold market would be an understatement of sorts. UK's Brexit vote and Donald Trump's triumph in the US Presidential election, followed by the Federal Reserve's 0.25% interest rate hike and a strong US dollar, saw the yellow metal post price swings that were unheard of in recent years.

On 4 January 2016 – the first full global trading day of last year – the Comex gold contract, often considered the most watched futures contract in the precious metals market, stood at $1,075.20 an ounce. However, by August it had spiked to $1,372 an ounce as the Brexit vote sent investors scurrying for gold with safe-haven calls in favour of the yellow metal rising to record highs.

After a subsequent decline, Trump's win at the US presidential poll in November sent gold prices up again, but the $1,372 level could not be breached, and as it turned out was the peak level for futures in 2016.

Instead, the market began pricing in a US rate cut triggering a gradual slide. When the Fed actually moved to raise interest rates in December, gold's subsequent slide had as much to do with forward guidance issued by the American central bank.

After instituting the hike, Chairwoman Janet Yellen opined that the Fed could introduce another three rate hikes over the course of 2017. For a central bank that had only hiked twice over the last decade, such policy guidance meant that the ongoing dollar spike and gold slump accelerated with the latter slumping to $1.131 at one point.

Were the Fed to act upon Yellen's guidance, it could be very bad news for gold. Seven out of 12 analysts polled by IBTimes UK believe that the yellow metal could slump back to $1,000, even if 2016 ended with gold posting an annualised uptick of 9%.

Gold ingots
Gold futures could find support if Donald Trump continues his erratic antics in the White House.Reuters

However, there is another wild variable factor on the horizon – President Trump. Known for his Twitter outbursts, protectionist soundbites and idiosyncratic worldviews, an unrestrained Trump could unsettle markets pushing investors to seek the safe-haven comfort of gold yet again.

Big question is whether the combination of dollar strength and prospects of higher US interest rates do enough to repel investors' attraction for gold in the wake of Trump tantrums and wider macroeconomic permutations.

Richard Hunter, Head of Research at Wilson King Investment Management, believes gold, a commodity susceptible to wild swings over spontaneous market fears, is there for an uplift given how Trump has acted prior to his entry to the White House.

"Trump takes to Twitter at the slightest provocation. Even before his entry to the White House, his angry responses are already having an impact on companies and markets. Once in office, were he to continue in a similar vein, the effect would be amplified many times over.

"In which case, it is natural to assume that investors would seek the safety of ploughing money into gold. That said, since gold is zero-yielding, I would perhaps only allocate 5-10% of my portfolio to it as an insurance hedge and nothing more."

Mihir Kapadia, chief executive of Sun Global Investments, expects the US debt dynamic to turn positive for gold in 2017.

"While Trump's policies may either boost or slow down the American economy, subsequent levels of the country's debt, which stands over $14trn, will have a conscious impact on the overall outcome. Any mistakes on the policy front, coupled with the higher interest costs and rising debt ceiling could present a bullish scenario for gold."

Gold-related funds

Furthermore, Trump has no monopoly over spooking investors, as Commerzbank analysts recently briefed their clients. The German banking giant said Europe has plenty of anti-establishment parties to stir the political pot, with Italy, Holland, Germany and France, grappling with their respective populist versions of the Donald.

Many do see it that way. For instance, spooked investors made sure eight of the top 10 funds in 2016, as measured by Hargreaves Lansdown, were all gold related, despite data pointing to periods of decline especially towards the end of 2016.

These include – WAY Charteris Gold & Precious Metals (up 123.5%), Junior Gold (up 119.6%), SF Webb Capital Smaller Companies Gold (up 85.1%), Smith & Williamson Global Gold & Resources (up 82.1%), JPMorgan Natural Resources (80.6%), CF Canlife Global Resource (up 74.4%), Investec Global Gold (up 72.8%) and CF Ruffer Gold (up 71.1%).

It is also worth remembering why gold is called a precious metal for a reason – its rarity. Mining data aggregators suggest the number of new gold deposits discovered in 2015 is down by a massive 85% since 2006. By some measures, gold production could peak as early as 2019, though this is disputed.

So rarity of the resource, spooked investors, uncertain economic outlook and a pumped up Trump could well support gold, even if the odds are long with the market fearing at least three US interest rate hikes.


Gaurav Sharma is the Business Editor of IBTimes UK. He has been a financial journalist for over 15 years, with a core specialisation in macroeconomics and commodities. Follow Gaurav on Twitter.