Last year's gold market can be summed up in the famous opening paragraph of the Charles Dickens novel A Tale of Two Cities... “It was the best of times, it was the worst of times…”
Following the Federal Reserve's December 2015 interest rate hike (the first in nearly 10 years), the price of gold skyrocketed. In fact, during 1Q 2016, gold prices experienced their largest quarterly gain in three decades.
Global gold demand reached a record 2,335 metric tonnes in the first half of the year. And hundreds of millions of dollars came rushing into the gold and mining markets again.
Then came the Brexit referendum in late June, and gold jumped to well over $1,300 an ounce. All told, the price of gold increased 26% during the first half of 2016.
Gold Prices 1H 2016
Gold and silver stocks were absolutely killing it.
But then the gold market's “spring of hope” came to an end.
From there, gold prices dropped week after week leading into November, when the yellow metal really got a blow to the gut following the Trump victory. Between July and December, gold prices lost over 15%, pushing them all the way back down to $1,300/oz.
Gold Prices 2H 2016
Since then, the price of gold has recovered a bit, now trading at $1,200 an ounce. But the outlook for gold this year is extremely bright. And here are five reasons why...
1. Geopolitical Changes
The world is changing. Donald Trump brings protectionist politics back to America for the first time since WWII. And across the pond, strong anti-EU and anti-immigration sentiment now has a “hard Brexit” planned.
This year there will also be key elections in France, the Netherlands, and Germany, all of which have popular anti-EU and anti-immigrant party leaders. There's good reason to suspect that 2017 might be the year the EU really starts to break up.
The rise of protectionism politics in America, the U.K., and elsewhere has already opened a door for other nations, like China, to position themselves as economic globalist leaders.
China's President Xi spoke for the first time at the 2017 World Economic Forum in staunch defense of economic globalization, condemning the rise in protectionism politics in America, the UK, and elsewhere.
The Wall Street Journal reported that President Xi's speech depicted “an effort to fill a vacuum being created by the U.S. stepping back from a global leadership role.”
All of this political and geopolitical change comes with a great deal of risk. Gold is the safe haven asset to own during times of political and geopolitical risk. The yellow metal has historically performed better than any other high-quality liquid asset during periods of crisis.
2. Overvalued U.S. Equity Markets
The U.S. equity markets are overbought. And even the guys who profit the most from heavy trading volume agree. The CEO of TD Ameritrade talked to Bloomberg on Wednesday, saying the Trump rally “got ahead of itself.”
With the surprise of Trump's election victory, investors became dreamy-eyed optimists and overly increased their exposure to risk. Now, they're just keeping their fingers crossed hoping Trump will make good on his promises.
Whether that happens or not is left to be seen. But it's very unlikely that Trump will be able to make any immediate or significant positive economic impact. And all of the hope and expectations are already priced into the market.
Without some major announcement or event, the U.S. equity markets could have just topped for the time being. And stagnation or decline in American equity markets is positive for gold as a safe-haven hedge.
3. Continued Economic Growth in Asia
Asian economies are still growing at unprecedented rates and will drive gold demand. Last year, China's economy grew by 6.7%, and it is expected to grow again by 6.8% this year. India's GDP grew by over 7% last year and is expected to grow again by 7.7% in 2017, making it the fastest-growing economy.
There is a strong correlation between increasing wealth in Asian economies and gold demand. In the early 1990s, before the Chinese and Indian economies really began to develop, their combined share of world gold demand was about 25%. Last year, China and India accounted for more than 50% of the world's total gold demand.
It's expected that Asia will account for around 60% of global growth this year and should significantly contribute to rising gold demand.
4. Growing National and Personal Debt
Around the world, there is over $150 trillion in debt. Here in the U.S., our federal debt is now over $19.96 trillion.
When the U.S. public debt hits $20 trillion — which will be any day now — it will be national and international news and add a new level of uncertainty and doubt to the U.S. economy.
The price of gold has a strong correlation with U.S. federal debt that extends beyond fears. That's because, even though they're no longer coupled under the Bretton Woods system, the U.S. dollar and gold still exist as primary competitors for wealth storage. And the value of the dollar is inseparably linked to U.S. federal debt.
Meanwhile, household debt in America is rapidly on the rise.
Since the beginning of 2015, the average American household has increased its debt (including mortgages) by 5.5%. New data from the Federal Reserve Bank of New York and the U.S. Census Bureau show the average American household has $132,529 in debt. Here’s what the typical household is carrying in debt:
From here, American household debt is expected to increase over 14% over the next four years.
And this rising household debt is not limited to America. Household debt in England and other EU countries is at an all-time high. At the end of November, the Bank of England said total British household debt was £192 billion ($235 billion), not including student debt.
Gold prices do not have any direct correlation with household debt. However, high levels of household debt correlate with economic uncertainty and doubt, which bodes well for safe-haven assets like gold.
5. Globally Rising Inflation
U.S. inflation increased to 2.3% in December, the highest level in five years. All throughout 2016, key Fed members have said they wanted to increase inflation to their target of 2%. But both Fed Chair Janet Yellen and San Francisco Fed President John Williams have argued for increasing the Fed's inflation target. So we could see even higher consumer prices here in the U.S.
Worldwide, inflation is also on the rise. German inflation hit its highest level since 2013 in December; meanwhile, U.K inflation hit a two-year high. And inflation is on the rise elsewhere in Europe.
Meanwhile in Asia, Chinese inflation was at its highest level since 2011 in December, and the Bank of Japan is looking to increase its own 2% inflation target.
It's clear that a deflationary threat to gold has subsided and the world is headed back into an inflationary period. Inflation makes bonds and other fixed income assets less appealing and helps to keep interest rates low. Gold has historically acted as a hedge to inflation and typically experiences heavy price gains due to increased demand.
Check back tomorrow for the next five reasons that gold will soar in 2017. You don’t want to miss it.