All Signs Point Towards an Upward Trend in Gold Prices
It looks like gold prices could see a huge upswing next year, and here are three solid reasons why: first on the list is a possible global economic collapse, but there is also a likelihood of a U.S. dollar decline and money printing becoming a prominent policy tool once again.
You should keep in mind that the U.S. dollar and gold prices have historically had an inverse relationship. Essentially, this means that when the greenback rises, gold prices nosedive and vice versa. Would it surprise you to know that this exact pattern has been witnessed in the dollar-gold relationship since last March?
1) The U.S. Dollar Is Heading into a Decline
It doesn’t take an MBA to know that the U.S. dollar is on its way towards a steep decline, and it could be upon us faster than you think. If you need further proof, just take one look at the chart below of the U.S. Dollar Index. What this particular index does is highlight the value of the greenback versus other important global currencies.
Chart courtesy of www.StockCharts.com
A cursory glance at the chart indicates that there has been a fairly predictable movement in the value of the U.S. dollar, and despite the recent upswing, this is not sustainable. Remember that the recent optimism surrounding the greenback is built on a shaky foundation, which is that the Federal Reserve will indeed be raising interest rates next month. (Source: “December Fed rate hike forecasts firm after strong jobs data: Reuters poll,” Reuters, November 10, 2015.)
We have heard this song and dance before and were disappointed in September. When we find out in December that the Fed has chosen to kick the can down the road yet again, the U.S. dollar’s drop in value will kick-off 2016 quite negatively.
Why would this have anything to do with gold prices, you ask? If you remembered what we discussed earlier, the inverse relationship between gold and the U.S. dollar, we could be standing at the beginning of a massive gold price rally.
But it doesn’t stop there; there are other reasons to remain bullish on gold.
2) Possible Global Economic Instability
It’s no secret that the global economy has entered into a volatile period right now and there are no indications it will be ending soon. On the contrary, there are worrying signs that this could only be the beginning of another financial crisis.
There’s no denying that the world economy is slowing down, with declining economic growth rates, commodity price slumps, and rising uncertainty over which direction things could go in. (Source: “OECD cuts global growth forecasts amid ‘deep concern’ over slowdown,” BBC, November 9, 2015.)
Until very recently, China was the global economic powerhouse, a growing giant with an insatiable demand for commodities in particular. This summer’s Chinese stock market crisis, when combined with the very real slowdown in economic growth data emanating from Beijing, means that those who predicted a slowdown in the Middle Kingdom’s economy turned out to be correct. (Source: “OECD Trims Global Growth Forecast on Emerging-Market Slowdown,” Bloomberg, November 9, 2015.)
China’s economy is unlikely to reach double-digit growth rates again anytime soon—perhaps never again. Though gross domestic product (GDP) growth will hover in the range of seven percent this year and perhaps even into 2016, there is very real cause for concern when you consider that the experts are forecasting it to fall between three and five percent soon.
But if you think China is the only major economy in trouble, think again. The International Monetary Fund (IMF) has continuously reduced its economic forecast on global grow rates. (Source: IMF, last accessed November 11, 2015.) If they were reduced even further, few people in-the-know would be surprised.
This is where things get tricky to analyze, because when the going gets tough for the global economy, all sorts of unforeseen issues could pop up. The deep economic, political, and social ties between nearly all of the countries in the world guarantee that when a crisis hits, we will all be affected. But how are investors supposed to plan ahead in times of such uncertainty?
In gold, because this is exactly the type of scenario in which investors have flocked toward the yellow metal for thousands of years. When economic uncertainty hits and no one is exactly sure just how far south financial markets could go, safe havens such as gold absolutely flourish. This has been the case for centuries and will remain so well into the future. You really can’t argue with the weight of history.
When the stability of other asset classes is doubted, investors buy mass amounts of gold. This is easily the most predictable and consistent economic phenomenon from a historical perspective. It’s for this reason that gold prices could be about to skyrocket.
3) Could Money Printing Be Back in Fashion?
Central banks have been busy since the financial crisis in 2009, lowering prime interest rates and printing money like it’s going out of style, all to ward off the economic boogeyman. (Source; “What If Banks Didn’t Create Money?” Bloomberg View, November 9, 2015.) But this set of policies can only take you so far and a wise investor has to ask her or himself just when exactly this process will stop? If it worked since 2009, then what’s to stop the bankers from just printing more money.
The prime offenders here are the European Central Bank (ECB), which has been continuously churning out more euros in an effort to prop up the battered European economy, and the bank of Japan, which is dealing with its own unique problems in the island nation’s economy. (Source; “The Bank of Japan keeps printing money at speed,” The Economist, October 30, 2015.)
The logical question that follows is this: will this strategy spread and who will take it up next? Many economists have predicted that the U.S. might be heading towards a fourth round of quantitative easing and they expect the Federal Reserve to maintain artificially low interest rates, at least into the near-term. (Source: “Morgan Stanley Bond Team Faces the Question: Can Fed Avoid QE4?” Bloomberg, October 7, 2015.)
But more troubling news is coming out of China, which analysts have speculated will be lowering its own interest rates even further as well as printing more yuans.
There is no end to economies around the world, both large and small, using these measures to keep the financial wolf from blowing down their doors. The dual strategy of keeping money production high and interest rates low is nothing new, but the practice is spreading like wildfire.
The Bottom Line on Gold Prices
Now, we all know what happened back in 2009 and if you think we’re safe this time around, you’re falling for promises that the central banks can’t keep. If, or when, the global economy starts to tank, and remember that there are good reasons to believe it will, gold prices will absolutely soar because investors, as always, look for stability in times of crisis. There’s no other way to sugarcoat things, because if the central banks continue their unsustainable policies of printing more money and maintaining low interest rates, we are in big trouble.
It doesn’t take a genius to see which direction things are going in these days and we could be heading towards an economic scenario far worse than the one in 2009. When that happens, you can bet that those investors who were smart enough to take a solid position in gold bullion and gold mining companies will see substantial returns in their portfolio.