SUMMARY OF 2017 ON THE GOLD MARKET

Across the ocean, 2017 was marked by controversy surrounding Donald Trump's presidency. The media even coined the term " Trump effect," which was also used in relation to the gold market. Gold prices reacted sharply to successive tensions on the American political scene and the bold decisions of the new leader. One example is the April bombing of a Syrian military airport belonging to Bashar al-Assad's regime. Immediately after the attack was announced, the price of gold rose by 1% and reached its 5-month high (approx. $1,266 per ounce). The price rally ended in mid-April, when the price of gold approached $1,290 per ounce. The scandal surrounding the sudden dismissal of FBI Director James Comey also worked in gold's favor. As a result of subsequent reports about the circumstances of his dismissal and Trump's alleged contacts with Russian intelligence, in mid-May the price of gold rebounded from its low and exceeded $1,290 per ounce in early June. The $1,300 per ounce level was reached at the end of August, shortly after the terrorist attack in Barcelona.

Tensions between the US and North Korea have been mounting for almost the entire year. Numerous provocative actions by the totalitarian republic, including a hydrogen bomb test in September, have heightened investor anxiety, directing their interest toward so-called safe havens, which include gold. However, experts point out that geopolitical threats only triggered short-term reactions and therefore the so-called fear factor did not have a significant impact on overall market trends.

Macroeconomic conditions had a fundamental impact on the gold market. From this perspective, last year proved to be quite difficult for the precious metal. The Fed raised interest rates three times – from 0.75% to 1.5%. The US stock market continued its rally, marking its ninth consecutive year of bull market. The S&P 500 index rose by more than 17%, while maintaining the lowest volatility since the last financial crisis. Trump did not disappoint either – the Republicans managed to pass the new tax bill promised during the election campaign. According to Jonathan Golub, chief equity strategist at Credit Suisse, the tax reform has the potential to increase the profits of companies included in the S&P 500 index by as much as 8-10%. The US economy has therefore gained momentum, accompanied by record low unemployment.

In the face of economic strengthening, the most important support for gold was the continuing weakening of the dollar, particularly against the euro and the British pound. Over the year, the US currency index fell by around 10%.

2018 will be a time of verifying Trump's grandiose promises. The US economy has undoubtedly accelerated, but the long-term effects of the president's reforms are not entirely clear. Economists across the Atlantic warn that tax cuts could lead to an increase in the budget deficit, returning it to the level seen during Barack Obama's presidency, when it exceeded one trillion dollars. The question of Trump's second flagship project, his grand infrastructure plan, also remains open. The success of this investment must be preceded by a long legislative battle.

Huge debt, a growing deficit, and uncertainty about the implementation of pre-election pledges are the main threats to Trump's administration. It can be expected that turmoil in the White House and the continuing weakening of the dollar will continue to provide fundamental support for gold prices. Even taking into account further Fed rate hikes, interest rates will remain at record lows, making gold unrivalled compared to savings accounts or bonds.

Gold market experts predict that last year's upward trend will continue this year. The price of gold is likely to exceed another psychological barrier of $1,400 per ounce. And although this level may not be maintained, the rate of return for the whole year has a good chance of exceeding 10% again.

Patrycja Fijałkowska
Mennica Skarbowa