Instead of choosing a stock, our candidate for investment at the biggest potential in 2017 is gold. On the basis of the ETF GLD, we can see that gold is up 7% last year. Yet, the yellow metal has declined at an annualized rate of 3% and 7% respectively over the past 3 and 5 years. After experiencing a bear market following its peak of about $ 1,900 in September 2011, I think gold reached its lowest in December 2015 at $ 1,050. It is now on an upward trend; that's why we love gold at its current price of $ 1,242.16.
US and Chinese inflationary policies will generate speculative flows to gold
It is estimated that the tax cuts for President Donald Trump will increase the federal debt by $ 7.2 trillion over the next decade and up to $ 20.9 trillion by 2036, all this in addition to 19 trillion already existing. In the absence of such additional spending, since the modern era, Congress has never managed to implement tax cuts without lower tax revenues. And it is expected that the US federal debt Increases from 77% of GDP to 86% by the end of the decade, amounting to about 23 trillion, on the basis of social spendings such as Social Security and Medicare / Medicaid. Higher tax expenditures in a tight labor market and rising wages still lead to higher inflation.
Similarly, accommodating tax policies and the rise in the housing market have led to an increase in credit in China. The recent rise in real estate began in April 2015 as Chinese equities began to fall from their highest. Today, we are witnessing the same phenomenon on the real estate market, while regulators are setting up macro-prudential policies to deflate the bubble. Chinese speculators are now turning to the commodities market to insure against the depreciation of their assets denominated in Yuan. During the last some months, zinc and copper, for example, rose by 20 and 25%, respectively, buoyed by Chinese purchases. Finally, gold futures volumes in China have increased by about 25% over the WEC, suggesting that the ability to influence the price of gold is increasingly in the hands of traders and Chinese hedge funds.
Demand for gold jewelry in China and India to recover in 2017
According to the World Gold Council, global demand for gold jewelry, equivalent to half of the world's annual gold demand, fell by 21% in the third quarter compared to last year. This decline was fueled by an unprecedented decline in jewelry demand in its two largest global markets, China and India (which together account for 60% of global demand). In these two countries, the decrease is respectively 27 and 41%. The demand for jewelry is expected to reach a 7-year low in China this year, 13 years in India.
This weakness in the jewelry markets in China and India is due to a confluence of factors that will not be repeated in 2017. These factors include:
· Loss of consumer confidence in China
· Restrictions on gold imports to China to limit capital flight
· Increase in customs duties on gold earlier this year in India
· Monetary crisis in India where the government has demonetized large cuts
With the recent correction in the price of gold, we expect Chinese and Indian consumers to increase their purchases of jewelry in 2017. A major Hong Kong merchant, Wo Shing Goldsmith, has already reported an increase of 20 to 25% of its sales of gold jewelry during the last months.
Inbound speculative flows from the GLD have capitulated, suggesting that it is a good entry point
In the month of Brexit and subsequent, gold stocks in the GLD increased by 3.7 million ounces, or 13%, to a total of 31.6 million ounces. The small investors rushed on the yellow metal against a background of fears of potential dislocation of the European Union. Since then, ETF gold inventories have declined by 4.1 million ounces for a total of 27.5 million ounces (7-month low). This means that most investments related to the Brexit have capitulated and out of gold. From a contrarian and trader perspective, the current $ 1,251.90 is a good entry point.
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