Gold Prices in 2016: Five Reasons Why They’re Headed Higher

Gold_Prices_2016

The second quarter of 2015 marked the 18th consecutive quarter that central banks have been net buyers of gold bullion. Regardless of higher or lower gold prices, central banks have been net buyers of gold since 2009.

The two central banks I’m keeping an eye on in respect to gold purchases are Russia and China.

Russia and China Heavy Buyers of Gold Bullion

In the 110 months between August of 2006 and August of 2015, Russia bought gold bullion in 95 of those months. (Source: World Gold Council, accessed October 15, 2015.)

During that period, the Russian central bank purchased 1,100 tonnes of gold. To put that into perspective, 1,100 tonnes of gold is about 40% of 2014’s total global mine production. (Source: U.S. Geological Survey, last accessed October 15, 2015.)

China’s gold buying is critical, too. There had been speculation that the central bank of the second-largest economy in the world was buying gold in large amounts. In June of this year, the People’s Bank of China reported an increase of 604 tonnes in its gold reserves. In July and August of this year, the central bank of China bought another 35 tonnes of gold. Rumors persist that China has a lot more of the precious metal in its vaults than it reports.

Plus, smaller central banks like Kazakhstan have been buying gold for 35 consecutive months!

Where Are Gold Prices Headed Next?

Why are central banks buying gold month after month? Have they lost trust in fiat money or are they just hoarding the asset that has provided the most safety in uncertain times?

While we may not know these answers for years to come, here is what we do know:

  1. The decline in gold prices that started in 2011 has forced many gold miners to cut production at mines where gold bullion was produced at $1,200 an ounce or more. That means a reduction in supply.
  2. To conserve cash, gold miners have cut their exploration budgets. This means a decline in long-term supply.
  3. Central banks have been net buyers of gold bullion for 18 consecutive quarters now. That means demand for gold bullion is strong.
  4. Consumers have been big buyers of gold, especially in countries like China and India. That also means demand is strong.
  5. Instead of talking about raising interest rates as the U.S. economy continues to soften into 2016, talk from the Federal Reserve will turn to a new form of QE, which I refer to as QE4. The more paper money printed, the better things get for gold prices.

Dear reader, the above are my five reasons why gold prices will rise in 2016. The shares of quality gold mining companies continue to sell at historic lows, providing great opportunity for contrarian investors.

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