The growing risk of stagflation where economies struggle with stagnant economic growth and rising inflation is expected to drive gold prices higher, according to Dr. Alan Greenspan, the former Federal Reserve Chairman (1987 – 2006) said in the latest World Gold Council’s February 2017 Winter report.
The former Fed chair believes that given the risks of stagflation and the current political uncertainty across the globe, investors will seek safety in the precious metal as insurance for long-term protection and not for short term gains. This was evident from the fact that global demand for gold rose 2% in 2016 to 4,309 tonnes, which the World Gold Council puts it at the highest level since 2013.
Dr. Alan Greenspan further adds that from the U.S. as inflationary pressures growth, the price of gold will also start increase, calling gold as the “primary global currency.” Highlighting the risks of stagflation, Dr. Greenspan said that the 1970’s stagflation in the U.S. which saw interest rates being quickly hiked to 20% resulting in a lot of imbalances.
Most of the gains in gold came from fund inflows into gold backed Exchange Traded Funds (ETFs) which accounted for 532 tonnes, marking a second highest year on record.
Last year was marked by political turbulence and the rise of populist and nationalistic political parties and leaders. What was thought unthinkable happened as the UK decided to part ways with the EU and the U.S. elected president Trump who has vowed to put “America First” in a bid to pursue protectionist policies and threaten global trade.
Although the markets seem to have taken the developments in the U.S. and the UK in its stride, investors will be facing a lot more uncertainty especially from Europe and some of the major economies such as Germany and France head to polls this year. Given the surprise victories in the U.S and the UK, investors are certainly not leaning on any opinion polls and even bracing for a potential disintegration of the EU should the anti-establishment parties win the polls.
Besides the political uncertainty, nations such as Greece and Italy show no signs of the financial crisis abating which makes the outlook from the European Union more uncertain and thus being of the key drivers in gold prices outside the traditional norms of the U.S. or demand from China and India.
Gold prices have managed to hold up against a bullish stock market which has been charting new heights while also braving the hawkish tightening cycle from the Fed. Gold’s move has been somewhat muted this year so far, compared to last year where Gold prices posted one of the strong rallies in recent times. Braving a second rate hike, gold prices managed to recover after falling to $1122 an ounce in mid-December. The decline in gold prices came alongside renewed optimism of fiscal spending from the new incoming U.S. administration.
Gold – Technical Outlook
Gold prices have managed to maintain steady gains, for the most part, this year despite the initial decline in late December. With gold prices rising towards $1250 in the near term, the bias remains rather mixed. The sideways range in gold could continue with support at $1200.00 likely to be tested ahead of the Dutch and French elections coming up in March and May.
Further gains can be expected in gold, only on a break above $1250.00 in which case, gold prices could easily target $1300.00 while to the downside, in the event of a breach below $1200.00 could signal further declines towards $1000, especially if the initial risks from the Netherland and French elections dissipate.