Rout in Gold and Silver Prices to Reverse
It is not a great time to be a precious metal bull. Although, maybe it is if you like to buy low and sell high. That said, gold, currently trading near $1,055 an ounce, is at its lowest levels in almost six years and has been in a freefall for more than six weeks. Silver prices spent most of November in the red and, trading near $14.00 an ounce, they are at their lowest levels in more than six years. Having said that, there will be more enough catalysts in 2016 to present precious metal investors with some great opportunities.
Investors Shunning Precious Metals
Typically, investors run to precious metals like silver and gold when they get nervous about the markets, the economy, or geopolitical tensions. But for some reason, that’s not happening right now.
The broader markets have more than recovered from Black Monday in late August, the markets didn’t blink at the atrocious attacks in Paris, global economic indicators remain tenuous, the stock market is wildly overvalued, and fourth-quarter earnings and revenue projections are underwhelming. None of these issues, however, have helped stop the freefall in silver and gold prices.
Silver hit a high of near $50.00 an ounce in April 2011, while gold hit an all-time high of approximately $1,980 an ounce in September of that year. Back then, precious metals were being supported by the U.S. credit rating downgrade and economic crisis in Europe. It’s all been downhill since then, though.
And some think the slide will continue. One well-regarded gold prognosticator believes precious metals, like stocks and bonds, rarely trade at fair value and are influenced by investor optimism and pessimism. On top of that, gold and silver prices tend to move in extremes before returning to a semblance of fair value. Until that happens, he predicts gold could tumble to $350.00 an ounce. (Source: “Prepare for gold prices to plunge…as low as $350,” CNN Money, July 30, 2015.)
Have silver and gold prices bottomed? Trying to time the market never works. Except for the one person who did happen to buy at the bottom or sell at the top, and I’m sure he/she never really even meant to do it; it was more of a lucky fluke.
3 Reasons Why Precious Metals Are Out of Favor
There are more than enough reasons why investors should be bullish on silver and gold. At the same time, there are a few reasons giving investors pause, namely the situation in China, the U.S. dollar, and a cagy Federal Reserve.
First, the Federal Reserve has hinted it may finally start to raise rates in December. If it does, it will be an infinitesimal token gesture, just like it was when the Fed first started to cut back on its quantitative easing (QE).
By doing so, the Fed is telling us that the economy is strong enough to support a rate hike, though deep down, the Fed knows the economy isn’t strong enough to handle a serious rate hike. Regardless, this is bad news for gold, since investors like gold as a hedge against economic uncertainty. On top of that, gold doesn’t pay interest; it just sits there. Bonds look more attractive than gold at that point.
Second, the U.S. dollar is surging. Since the beginning of 2014, the U.S. dollar has gained 24.5% against a basket of currencies and it is up 10.2% in 2015. Keep in mind that the U.S. dollar is up, in part, because the other currencies it is compared to are not doing all that well either. But I digress.
A strong U.S. dollar is bad for gold, since most of the world uses the U.S. dollar to trade gold. When the value of the U.S. dollar rises, precious metals prices are pared down. In 2016, the U.S. dollar is projected to get even stronger, with some analysts even predicting parity with the euro.
Finally, the Chinese economy remains weak. Sure the “ever-transparent” Chinese government says the country’s economy is growing at a still robust seven percent, but many believe it is really growing at just half that pace.
This Is Why Gold and Silver Will Rebound in 2016
Precious metals like silver and gold are an opportunity, just like stocks and bonds are. They are either undervalued or overvalued and the long-in-the-tooth bull market could experience a solid correction in 2016, with the S&P 500 experiencing its first calendar-year loss since 2008.
Equities correct because investors get nervous and the same reasons cited above for pushing silver and gold prices down could also explain why silver and gold prices will rebound in 2016.
The stock market is overvalued and investors will get nervous about higher interest rates, economic slowdowns in China and Europe, and low commodity prices. Uncertainty about the U.S. election could also cause additional concern, as will future interest rate hikes.
This does not mean precious metals will return to record-highs, but it does mean investors should keep an eye on silver and gold and take advantage of short-term opportunities—the same kinds of short-term opportunities that have been present even in an awful year like 2015.