What is Next for Gold?

After reaching its historic record at more than USD 1,900 per ounce ($1,900/oz) in August 2011, the price of gold dropped over 40% during the ensuing four years, bottoming at $1,050/oz in December 2015. Since then, gold rallied 30% higher by June 2016 to over $1,350/oz, becoming one of the best performing commodities during that period. But since its June peak, gold has slipped lower by 8% to about $1,250/oz currently.

The recent price drop can be linked closely to two events – the anticipation that the U.S. Federal Reserve will raise interest rates, and hence strengthen the USD relative to other currencies and commodities (and hence the weakness in gold prices), and global macroeconomic and political factors. Many market observers are trying to gauge what impact the U.S. Presidential elections in November will have on gold. One colorful, if slightly off-colored prediction states: “it does not really matter who wins the election. Gold is poised for over a 325% gain in the years ahead because of the mess that both political parties and the Federal Reserve have created in the past and accelerated since the 2008-2009 financial crisis. Good luck to Hillary (or Trump)… Whoever wins is screwed.” (Palisade Research through www.mining.com)

The logic behind this forecast is simple and based on the fact that gold is considered a safe haven during turbulent times on the financial markets. As Palisade Research noted in that piece on www.mining.com, gold rose substantially in price during Richard Nixon’s (up 259%), Jimmy Carter’s (up 324%) and George W. Bush’s (213%) presidencies which were marred by high budget deficits and/or high inflation.

During Barak Obama’s tenure in the White House (when the price of gold rose by 54%), inflation has been less of an issue but the U.S. government debt skyrocketed from $10.6 trillion to over $19 trillion. This creates preconditions for a weaker dollar in the future. A weaker dollar would reflate prices of commodities, benefitting gold.

Interestingly, the republican candidate in the U.S. elections, Donald Trump, is considered likely to run the U.S. debt even higher in case he is elected President than the democratic candidate Hillary Clinton would if elected. In particular, in August 2016, Trump announced plans for a $500-billion infrastructure stimulus program which was taken negatively by the Republican Party’s base. Clinton’s infrastructure plan is estimated to cost $275 billion.

RBC Global Asset Management expects that, in the case of Trump’s presidency, U.S. federal debt held by the public could reach 105% of the country’s GDP in 2026. In Clinton’s case, the same indicator is expected to reach 86%. Sovereign debt levels above 100% of a country’s GDP are considered more risky and could at some point threaten the stability of the U.S. dollar.

Shorter-term forecasts for the price of gold on the other hand, are much less bullish. Mining.com provides several forecasts: John LaForge, head of Real Asset Strategy at Wells Fargo, believes that gold and commodities have “many more years of pain” ahead as they are currently in a bear market that started five years ago. He expects that gold will again go back to its 2015 low at $1,050/oz. Casey Research expects a sideways season for gold through the rest of the year: “Uncertainty over the US election and anxiety over the December rates decision will keep gold capped until those milestones are over.” If and when the U.S. Federal Reserve does raise interest rates, it may result in a one off drop in gold prices. If any rate hike results in a “one and done”, it could prove a good entry point for investors in gold mining stocks, gold ETFs and precious metals mutual funds.

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204

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