The last two years, 2013 and 2014, weren’t good for gold investors. I agree. There was severe scrutiny, and no matter where you looked, the yellow metal was disliked as an investment. Going forward, however, my 2015 gold market outlook continues to be bullish on the precious metal. As I have been saying in these pages, the fundamentals are suggesting we are headed toward a strong period for the precious metal.
Some of the biggest themes investors should be following this year include currency volatility due to shifts in monetary policy—in the U.S., the eurozone, and Japan—and the distortion in the demand and supply equation. The role of central banks in 2015 may be huge as well. All of these themes should affect your gold market forecast for 2015.
Currency Volatility & Shift in Monetary Policy
As it stands, the U.S. economy is doing phenomenally well. With this, sometime this year, the Federal Reserve is expected to raise interest rates. If you have seen the chart of the U.S. dollar lately, you likely noticed that it has seen a solid move to the upside.
Sadly, the rest of the world is suffering, as the situation is the complete opposite.
While the U.S. is focused on tightening its monetary policy, other major economic hubs like the eurozone, Japan, and China are working to inject further stimulus into their economy. For example, there has been a significant amount of noise suggesting the European Central Bank (ECB) will start to print more euros to revive the eurozone economy. If the ECB goes through with this printing, the euro will surely decline in value.
Japan has been printing for some time and nothing has really changed for the country. In 2015, I don’t expect anything to be different. The Bank of Japan will likely continue to do the same—print more money and keep its interest rates near zero. In the past, whenever the Japanese central bank promised to print more of its currency, the yen dropped.
Then there’s China, which is facing its share of economic scrutiny as well. The country is expected to show dismal growth this year compared to its historical norm. It will not be surprising to hear that the People’s Bank of China, the Chinese central bank, will be going ahead with some sort of stimulus as well.
All of this, no matter how you look at it, will create a significant number of swings in the values of currencies. Investors will be jumping ship, and those who are may find some comfort in owning gold in their portfolio. Central banks may see significant changes in their reserves as a result of weakening currencies, a phenomenon that may cause them to buy the precious metal, as well, to hedge against currency volatility. That’s positive news for gold.
Deterioration in Demand and Supply
While the currency volatility will clearly drive demand for gold, looking at demand alone, we see that it is severely higher already.
Let me explain…
Currently, we’re seeing buying from India. Consider this: in October, Indian gold imports increased by 280% from the same period a year ago. For the month, gold imports amounted to $4.17 billion.(1) One would assume this was a one-off event, but that is not the case. In November, imports of gold to India jumped 571% from the same period a year ago—up from just $835.83 million to $5.6 billion.(2)
The reason for this massive increase? India had imposed restrictions on importing gold; as a result, demand from the country declined. Now that those restrictions are being eased-off, we’re seeing a massive influx of buyers. Expect this to continue.
Of course, India is not alone; there’s another major buyer as well—China. Chinese demand for the yellow metal remains substantial. Last year, China became the biggest gold consumer. This year, I won’t be surprised to see it come in below India, but I do expect the demand to be very similar to that of the previous year.
Looking at the supply side, it’s bleak. Gold production is slowing down. To give you some idea, consider the gold production from U.S. mines. In the first nine months of 2014, gold production from U.S. mines was 159,000 kilograms (kg).(3) In the same period a year ago, this number was 170,000 kg.(4) This represents a decline of 6.4%.
What to Expect for the Gold Market in 2015?
In simple words: going into 2015, I am optimistic.
I follow gold companies closely, and from what I see, they have done a significant amount of trimming to their costs. If all the factors explained above act as expected, gold prices will rise. For mining companies, this time around, the profits will be huge due to lower costs.
But investors need to remember that patience is the key—and it pays off. There have been multiple instances when the gold market suffered severely, but when prices turned around, the gains were massive. Investors should focus on fundamentally strong companies with high-grade reserves. That’s my gold market forecast for 2015.