Gold’s future doesn’t look all that pretty, and most investors and analysts are expecting prices to fall lower on the back of what seems to be a recovery in the U.S. economy as the dollar strengthens and yields rise.

However, according to one U.K.-based analyst, one factor is being overlooked and may translate into a better outlook for gold in 2017.

Aside from the rising dollar, Tom Kendall, head of precious metals strategy for ICBC Standard Bank, is focused on the cost of rising yields, particularly to the U.S. Treasury.

As he explained it in a report released Friday, the Treasury is currently just under $14 trillion of U.S. treasury bills, notes and bonds outstanding. According to the Congressional Budget Office (CBO), he continued, net interest payments on that outstanding debt will amount to around $250 billion this year, with forecasts expecting net interest payments to reach $712 billion by 2026.

“However, since that August report was released yields on 5 to 7 year Treasuries have increased by around 80 basis points, most of which has come since the US election,” Kendall noted.

“If we apply an 80bps increase to the CBO’s net interest forecasts and keep the other variables unchanged, then by 2026 the Treasury would be paying an additional $185 billion in interest annually.”

Despite this, Kendall said that he expects this revival in U.S. economic confidence – or as he put is, “the current reflationary exuberance” – to persist into the first few weeks of Trump’s presidency.

“[I]n other words, real yields will probably rise further. In which case the dollar will stay firm and gold will remain largely unloved by institutional investors,” he said.

However, by the end of the first quarter, the mood would become “more sober” as the U.S. government focuses on the country’s debt dynamics.

“Discussions about the lifting the debt ceiling beyond $20 trillion will then begin in earnest,” he said. “Disappointment on the growth front coupled with rising interest costs and fractious negotiations on the debt ceiling could well result in a more bullish environment for gold.”

Despite this somewhat positive outlook, Kendall said gold is still up against potential headwinds and one key, yet unlikely, threat could be Trump’s tax plan.

“The one fiscal policy that could defer that positive scenario for gold would be a temporary reduction in the tax paid by US corporates on overseas earnings,” he explained. “A sizeable tax cut that incentivized repatriation would lead to a large one-off boost to the Treasury’s revenues. However, history suggests that would just postpone the inevitable.”

February Comex gold futures were slightly up Monday morning with prices last trading at $1,141 an ounce, up 0.32% on the day.

Gold prices ended the U.S. day session moderately down but up from the daily low. Silver prices fell to an eight-month low in early trading but rebounded to finish the day around unchanged and near the daily high. A strong U.S. dollar index that scored another 13-year high Tuesday was a bearish anchor pulling down the precious metals markets. However, when the greenback fell well off its daily high, gold and silver prices rose from their daily lows. February Comex gold was last down $8.90 an ounce at $1,133.80. March Comex silver was last down $0.004 at $16.09 an ounce.

Barring unexpected major geopolitical events, look for the precious metals and most other markets to start to wind down the rest of this week, as the Christmas holiday is on Sunday.

The world marketplace and safe-haven gold did not show big reactions to violence in Europe Monday that included the assassination of Russia’s ambassador to Turkey and terror attacks in Berlin and Zurich that left over a dozen people dead. However, the European stock markets did see buying interest limited on the terror attacks, while the Euro currency dropped to a 13-year low overnight, due in part to the attacks.

Many world stock markets are trading near multi-year and/or record highs and it would not be surprising to see those stock indexes at least pause, if not see some profit-taking, into the end of the year. Any significant pullbacks in world stock markets would be a bullish development for the competing asset class, safe-haven gold.

The other key “outside market” on Tuesday saw Nymex crude oil prices trade modestly higher after hitting a 16-month high last week. However, the Nymex oil bulls continue to struggle when prices are above the $50-a-barrel level.

(Note: Follow me on Twitter–@jimwyckoff–for breaking market news.)

Live 24 hours gold chart [Kitco Inc.]

2016-12-21gold (1)

 

Technically, February gold futures prices closed near mid-range. The gold bears have the solid overall near-term technical advantage. There are no early clues of a market bottom. Prices are in a six-month-old downtrend on the daily bar chart. Gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at last week’s high of $1,168.00. Bears’ next near-term downside price breakout objective is pushing prices below solid technical support at $1,100.00. First resistance is seen at this week’s high of $1,144.40 and then at $1,150.00. First support is seen at last week’s low of $1,124.30 and then at $1,120.00. Wyckoff’s Market Rating: 1.5

Live 24 hours silver chart [ Kitco Inc. ]

2016-12-21silver (1)

March silver futures prices closed nearer the session high after hitting an eight-month low early on today. The silver market bears have the solid overall near-term technical advantage. However, today’s high-range close suggests the bears have become exhausted. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at $17.00 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at $15.50. First resistance is seen at this week’s high of $16.265 and then at $16.50. Next support is seen at today’s low of $15.675 and then at $15.50. Wyckoff’s Market Rating: 1.5.

March N.Y. copper closed up 25 points at 250.20 cents today. Prices closed nearer the session high. The copper bulls have the overall near-term technical advantage but have faded to suggest a market top is in place. Copper bulls’ next upside price objective is pushing and closing prices above solid technical resistance at 265.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 228.00 cents. First resistance is seen at this week’s high of 256.00 cents and then at 260.00 cents. First support is seen at this week’s low of 247.75 cents and then at 245.00 cents. Wyckoff’s Market Rating: 6.0.

(Kitco News) –

(Kitco News) – It’s surprising how quick sentiment can change in five months, especially as the U.S. prepares to welcome a new President as Bank of America Merrill Lynch (BoAML) says it is now “cautious” on gold for 2017.

Bank of America Merrill Lynch has downgraded its gold forecast, expecting to see prices hit $1,200 an ounce by mid-2017Wednesday, in his presentation at the BoAML 2017 Year Ahead Press Conference., Francisco Blanch, head of Commodities and Derivatives, said that a stronger U.S. dollar and higher bond yields will be two major headwinds for the yellow metal next year.

In its updated forecast, BoAML it expects gold to trade around $1,200 an ounce by mid-2017, “implying limited upside near-term.” The Bank’s forecast is not far from current prices as February gold settled the session at $1,137.40 an ounce, up 0.67% on the day.

In his presentation, Blanch added that in general, higher yields could potentially create a toxic environment for the entire commodity complex.

“Higher interest rates are bad for commodity, in particularly when the yield curve flattens,” Blanch said.

Blanch’s subdued tone for gold is a sharp contrast to just five months ago when the bank was calling for gold to hit $1,500 an ounce. The bank increased its 2017 outlook in July after prices hit a 13-month high following the Brexit referendum.

Blanch said that the bank sees two possible scenarios for gold related to Donald Trump’s new presidency: the first is slightly positive where the nation sees a modest increase is deficit spending, which causes bond yields to remain relatively unchanged. The second scenario is more negative as major deficit spending could lead to higher bond yields.

In the bank’s interest rate presentation, Shyam Rajan, head of U.S. rates strategy, said that they see the potential for U.S. five-year bonds to rise sharply in 2017, flattening the yield curve as long-term rates remain subdued.

He added that this rise in shorter-term yields could force the Federal Reserve to be more aggressive in hiking interest rates than the market are currently expecting, especially as the government initiates new fiscal plans.

Another potential headwind for gold is BoAML’s expectation that real interest rates would likely rise in an environment of subdued inflation.

“Ultimately, 2017 is going to be a story of fiscal loosening and monetary tightening; the combination of which will mean real rates are headed higher and inflation break-evens don’t do much,” said Rajan.

SYDNEY, Dec 19 (Reuters) – Australia’s conservative government will on Monday give an update on the national budget that could trigger a downgrade in the country’s prized triple A credit rating and push up borrowing costs on over a trillion dollars of debt.

Facing slowing economic growth and a seemingly intractable deficit, Treasurer Scott Morrison is expected to reaffirm a pledge to return to surplus by 2020/21 through a mixture of spending cuts and tax-raising measures.

Many of the most contentious measures, however, are blocked in the Senate while record low wages growth and lacklustre nominal growth have badly crimped the government’s revenue take.

S&P Global Ratings put Australia on negative watch back in July and might even cut the rating a notch later Monday should Morrison’s plans fail to inspire.

Australia is among a dozen countries with the top rating from all three credit agencies.

A downgrade would likely nudge up borrowing costs on the Federal government’s A$465 billion in debt and on some of the states’ A$327 billion of borrowings and lead to Australia’s major banks being downgraded as well as their debt pile mounts to more than A$500 billion.

It would also be a political nightmare for the Liberal National government of Prime Minister Malcolm Turnbull, which has long sold itself as a competent economic manager that can be trusted to balance the books.

Morrison took to the airwaves early on Monday to essentially blame the opposition Labor Party for blocking budget savings measures in parliament, though many of the proposals are deeply unpopular with voters as well.

The budget update is due at midday and there are expectations that the A$37.1 billion deficit originally forecast for the year to June, 2017 could be revised to around A$40 billion.

“Australia’s push back towards an underlying budget surplus has felt a bit like “groundhog day”. It’s there in the forecasts but continually recedes into the distance,” says CBA chief economist Michael Blythe.

The Treasurer will also have to revise down estimates for growth after the A$1.6 trillion economy surprisingly contracted by 0.5 percent in the September quarter, the first shrinkage since 2011.

However, one bright spot has been a recovery in prices for many of Australia’s major commodity exports, with coal and iron ore surging in the past few months. If sustained, that will add billions to the tax take and could ease the pressure on the ratings.

And even if the country is downgraded, analysts said they doubted that it would have much of an impact on bond yields or investor confidence.

“Our feedback from clients across Asia is that they seem quite relaxed about the issue, with many noting that their mandates allow purchases of AA rated securities and any rise in yields would allow them to purchase AUD bonds at better levels,” said Andrew Ticehurst, an economist at Japanese broker Nomura.

It’s surprising how quick sentiment can change in five months, especially as the U.S. prepares to welcome a new President as Bank of America Merrill Lynch (BoAML) says it is now “cautious” on gold for 2017.

Bank of America Merrill Lynch has downgraded its gold forecast, expecting to see prices hit $1,200 an ounce by mid-2017Wednesday, in his presentation at the BoAML 2017 Year Ahead Press Conference., Francisco Blanch, head of Commodities and Derivatives, said that a stronger U.S. dollar and higher bond yields will be two major headwinds for the yellow metal next year.

In its updated forecast, BoAML it expects gold to trade around $1,200 an ounce by mid-2017, “implying limited upside near-term.” The Bank’s forecast is not far from current prices as February gold settled the session at $1,137.40 an ounce, up 0.67% on the day.

In his presentation, Blanch added that in general, higher yields could potentially create a toxic environment for the entire commodity complex.

“Higher interest rates are bad for commodity, in particularly when the yield curve flattens,” Blanch said.

Blanch’s subdued tone for gold is a sharp contrast to just five months ago when the bank was calling for gold to hit $1,500 an ounce. The bank increased its 2017 outlook in July after prices hit a 13-month high following the Brexit referendum.

Blanch said that the bank sees two possible scenarios for gold related to Donald Trump’s new presidency: the first is slightly positive where the nation sees a modest increase is deficit spending, which causes bond yields to remain relatively unchanged. The second scenario is more negative as major deficit spending could lead to higher bond yields.

In the bank’s interest rate presentation, Shyam Rajan, head of U.S. rates strategy, said that they see the potential for U.S. five-year bonds to rise sharply in 2017, flattening the yield curve as long-term rates remain subdued.

He added that this rise in shorter-term yields could force the Federal Reserve to be more aggressive in hiking interest rates than the market are currently expecting, especially as the government initiates new fiscal plans.

Another potential headwind for gold is BoAML’s expectation that real interest rates would likely rise in an environment of subdued inflation.

“Ultimately, 2017 is going to be a story of fiscal loosening and monetary tightening; the combination of which will mean real rates are headed higher and inflation break-evens don’t do much,” said Rajan.

SYDNEY, Dec 19 (Reuters) – Australia’s conservative government will on Monday give an update on the national budget that could trigger a downgrade in the country’s prized triple A credit rating and push up borrowing costs on over a trillion dollars of debt.

Facing slowing economic growth and a seemingly intractable deficit, Treasurer Scott Morrison is expected to reaffirm a pledge to return to surplus by 2020/21 through a mixture of spending cuts and tax-raising measures.

Many of the most contentious measures, however, are blocked in the Senate while record low wages growth and lacklustre nominal growth have badly crimped the government’s revenue take.

S&P Global Ratings put Australia on negative watch back in July and might even cut the rating a notch later Monday should Morrison’s plans fail to inspire.

Australia is among a dozen countries with the top rating from all three credit agencies.

A downgrade would likely nudge up borrowing costs on the Federal government’s A$465 billion in debt and on some of the states’ A$327 billion of borrowings and lead to Australia’s major banks being downgraded as well as their debt pile mounts to more than A$500 billion.

It would also be a political nightmare for the Liberal National government of Prime Minister Malcolm Turnbull, which has long sold itself as a competent economic manager that can be trusted to balance the books.

Morrison took to the airwaves early on Monday to essentially blame the opposition Labor Party for blocking budget savings measures in parliament, though many of the proposals are deeply unpopular with voters as well.

The budget update is due at midday and there are expectations that the A$37.1 billion deficit originally forecast for the year to June, 2017 could be revised to around A$40 billion.

“Australia’s push back towards an underlying budget surplus has felt a bit like “groundhog day”. It’s there in the forecasts but continually recedes into the distance,” says CBA chief economist Michael Blythe.

The Treasurer will also have to revise down estimates for growth after the A$1.6 trillion economy surprisingly contracted by 0.5 percent in the September quarter, the first shrinkage since 2011.

However, one bright spot has been a recovery in prices for many of Australia’s major commodity exports, with coal and iron ore surging in the past few months. If sustained, that will add billions to the tax take and could ease the pressure on the ratings.

And even if the country is downgraded, analysts said they doubted that it would have much of an impact on bond yields or investor confidence.

“Our feedback from clients across Asia is that they seem quite relaxed about the issue, with many noting that their mandates allow purchases of AA rated securities and any rise in yields would allow them to purchase AUD bonds at better levels,” said Andrew Ticehurst, an economist at Japanese broker Nomura.