Gold $3,600? Here’s Why Gold Prices Could Skyrocket
Gold prices have experienced a solid rebound last month, largely on the back of the U.S. Federal Reserve’s decision to not hike interest rates.
Gold prices have certainly taken a pounding in this year’s market trading, as predictions for a Fed interest rate hike grew ever louder. Now, a higher interest rate generally means that income-generating assets such as bonds and dividend-paying equities are a better choice for investors than appreciative assets like precious metals; these include silver and gold, which do not generate an income stream but go up in value on a long enough time scale. This development would provide solid upward momentum to the U.S. dollar, the drop in value of which is often hedged against with gold bullion investments.
Those Betting Against Gold Could Be Kicking Themselves Later
Janet Yellen, Chair of the U.S. Federal Reserve, along with her team, was quite open about the fact that an interest rate hike is indeed on the horizon, though the exact timeline is the stuff of speculation. In spite of the decision to hold off on raising interest rates in September, the Fed maintained its position that the U.S. will see an interest rate hike by the end of 2015. (Source: “Janet Yellen Expects Interest Rate Increase This Year,” Wall Street Journal, September 24, 2014.)
Gold prices, which were granted a temporary uplift on the news, deflated and immediately sunk back down. Following a peak price which was considerably lower than gold’s summer highs, the yellow metal declined back into negative territory.
Chart courtesy of www.StockCharts.com
The big question, of course, is just how accurately current trends in gold prices reflect the realities of the commodity’s economic fundamentals.
While the gold price appears to be hitting a multi-year low, real demand for the yellow haven is rising fast, especially in Asia’s emerging markets. Perhaps most surprising of all is that physical reserves of gold held by gold bullion vendors is quite low.
Gold bullion exports out of Hong Kong to mainland China are booming, touching 1,891.9 tons so far in 2015, equaling approximately 560.9 tons more than a year ago in 2014. (Source: “Gold Stays Low Despite China Buying,” Wall Street Journal, September 29, 2015.)
That’s a shocking figure, to say the least, and still more fascinating by the fact that Beijing still refuses to provide official and frequent data on the amount of gold it holds or the volume it trades. While such surges in demand for gold do occur in China, they happen almost without exception during the Chinese New Year, when the yellow metal is a traditional gift.
The Chinese New Year is coming up in February 2016.
You read that right. The implications of this massive out-of-season demand for gold are that the Chinese people are hedging against a possible stock market collapse. This is in no way an unusual behavior, and it outlines perfectly just how valuable gold can become in the right economic circumstances. Most importantly, the shift in perception from gold being an undesirable commodity to the most valuable thing you can own is one that occurs almost overnight, if an economic crash were to occur.
Historically speaking, silver and gold are absolutely always the first choice for those people looking to preserve as much of their money as possible when staring down economic instability. The result is that gold prices shoot through the roof, leaving those who were unwise enough to discard it as an investment option wishing they had been smart enough to allocate a portion of their investment portfolio to gold bullion.
Big deal, you say, because China is not the world.
But it’s not the only country with a soaring appetite for gold. India is in fact the world’s second-largest market for gold; gold bullion imports into the subcontinent rose by 140% in August 2015. (Source: “Gold imports jump 140% to $4.95 billion in August,” Economic Times, September 16, 2015.) The figure stands at about $4.95 billion, or roughly double July’s figure of 89 tons of gold. But there are still more buyers, because Russia, several other formerly Soviet states, and Mexico are gobbling gold up at a record pace this year. (Source: “Kazakhstan, Russia Buy More Gold as Mexico Cuts, IMF Data Show,” Bloomberg, September 24, 2015.)
But let’s take a step back and analyze the situation as it stands. What I’m explaining here is that while gold prices are sitting near multi-year lows, the actual physical demand for the yellow stuff is skyrocketing.
I don’t think I have to say this, but it doesn’t take an MBA to see that something doesn’t quite make sense here. When you’re looking at a market imbalance in commodities that is this imbalanced, a strong correction is likely on the horizon. The trick here is to find the most opportune moment in which to gauge that gold prices have hit a bottom, invest wisely, and ride the uplift towards massive profits in the future.
The Bottom Line on Gold Prices
But what about the U.S. Federal Reserve’s looming decision regarding interest rates? Far from being the negative catalyst which could deflate the gold price’s chances of rising, a modest rise in interest rates could in fact stabilize the gold price. What gold bullion needs is a stabilizing factor which puts economic stability back into the forefront, providing the sort of psychological foundation for the yellow metal to rise.
This is counterintuitive, I know. But hear me out.
The lack of uncertainty regarding the Fed’s agonizing decision is pressing down negatively on commodity prices like a bad hangover, which essentially depresses the confidence of investors to invest. Market fundamentals can’t take hold of the gold price and take it upwards if people are weary of the investing period. But once the interest rate is nudged upward, gold bugs will realize that while the economy is down, it’s definitely not out, and the supply and demand imbalance will do the rest. (Source: “Fed’s Evans: Later rate hike better for economy,” CNBC, September 28, 2015.)
It’s at that point that we will likely see a strong demand for physical gold taking grip of commodity markets, and gold prices will reflect that fact. When the veil of uncertainty gets lifted off the Federal Reserve’s decision on interest rates, the gold price could absolutely skyrocket through the roof.
It’s your choice on what side of the debate you want to be on when that happens.