Gold To Turn Positive Because This Is Being Overlooked – ICBC

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.