Gold Prices to Soar in 2016?
Gold prices are up roughly 17% year-to-date. The precious metal is hands down one of the best-performing asset classes so far in 2016. Bears beware—we could see much bigger gains later in 2016.
From a technical analysis perspective, we are seeing solid developments. Look at the chart of daily gold prices below. It appears as if optimism is pouring in.
Chart courtesy of www.StockCharts.com
There are three things we are watching closely.
First, gold prices are breaking above the downtrend that began in 2014. This is bullish.
Second, the 200- and 50-day moving averages (MAs) are well below the current gold price. Essentially, this tells us that optimism among investors is surging and they are excited to buy the precious metal.
Last but not the least, momentum and volume suggest buyers are coming in large numbers. Pay attention to the moving average convergence/divergence (MACD) indicator, a momentum metric, at the bottom of the chart above. The MACD suggests that bulls are in control of the gold prices and they could take them higher.
From a fundamental perspective, investors have to keep a couple factors in mind as well.
Know that uncertainty in the global economy is increasing. As I have said many times in these pages, it’s going to be great for gold prices. We could see extraordinary demand come in and the precious metal could soar in a very short period.
Remember: gold is a global phenomenon, and not just limited to the U.S.
We are seeing uncertainty starting to raise gold prices already—slowly but surely.
Consider South Korea as one example. On February 11, 46,448 grams of gold bullion was traded on the Korea Exchange (KRX). This was the highest amount since March of 2014!
Here’s the interesting part… Officials at the KRX noted that, regarding gold demand, “The surge is attributable to growing uncertainties at home and abroad such as China’s economic slowdown, the U.S. Fed’s possible rate hike and North Korea’s recent rocket launch.” (Source: “S. Korea’s gold turnover hits record high,” Yonhap News Agency, February 11, 2016.)
What to Expect from Gold in 2016?
Gold started on solid ground in 2016. I wouldn’t be shocked if it continues to move higher.
Remember how just a few months back, the yellow precious metal was called a “pet rock?” If the gains in gold hold, I’d expect to hear the big banks changing their tone towards the precious metal. We are already seeing a few changing their minds; more will follow.
Also, keep in mind that the higher gold prices go, the greater the returns on mining stocks. Since the beginning of the year, gold mining stocks have shown big increases.
Consider Barrick Gold Corporation (NYSE/ABX). With gold prices higher by 17%, ABX stock is up more than 50%. That’s close to a three-percent increase in Barrick’s share price for every one-percent increase in gold prices.
Mind you, Barrick Gold is one of the biggest gold miners. If you look at some junior miners, their performance could very well be much better than that.
I repeat—bears beware!