Gold Price Outlook: This Could Send Gold Prices Soaring in 2016
Gold prices had a slight rebound last week, supported by the U.S. Federal Reserve’s decision not to raise interest rates.
The yellow metal has taken quite the beating in market trading this year, as expectations of a Fed rate hike continue to mount. Higher interest rates would mean that income-generating assets will become more attractive to investors than commodities such as gold and silver, which do not generate income but instead appreciate in value over time. This would then lead to uplift for the U.S. dollar, whose decline is usually hedged against using gold.
But this scenario does not necessarily prove negative for my gold price forecast.
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The team headed by Chairman Janet Yellen over at the Federal Reserve took the time to be explicit that a rate hike is coming. Despite their decision to put a temporarily hold on rate hikes earlier this month, Yellen maintained that we will indeed be seeing a rise in interest rates in 2015. (Source: Wall Street Journal, last accessed September 30, 2014.)
The effect of this statement took the wind of out of the gold price rally’s sails, which had been given uplift by the rate hike hold. After peaking lower than its highs this past summer, the gold price has now slumped back into negative territory since Monday. The gold price on the Comex Exchange in fact dipped down to $1,126.00 per ounce.
Chart courtesy of www.StockCharts.com
But how well does this downward trend in gold prices match up with economic fundamentals?
Quite surprisingly, demand for gold is skyrocketing.
With gold prices now seemingly about to hit their multi-year low, physical demand for gold is surging, particularly in emerging markets in Asia. You might be surprised to find out that physical gold reserves are now at near-record lows.
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A recent Wall Street Journal report indicates that gold exports out of Hong Kong into China hit 1,891.9 tons in 2015 so far, which equals 560.9 more tons than at this time in 2014. (Source: Wall Street Journal, last accessed September 30, 2015.) This is a staggering number, and made even more interesting by the fact that China does not publish official data on gold trading. Considering that this surge in Chinese gold purchases is occurring before the traditional festival season, all signs point to investors hedging against the Chinese ongoing stock market crash.
From an historical point of view, safe haven assets such as gold and silver are always the number one choice for investors seeking to preserve capital in the face of economic volatility.
But China is not the only emerging market eagerly buying up gold.
India represents the second-largest gold market in the world, with gold imports surging by 140% last month. (Source: Economic Times, last accessed September 30, 2015.) This equals roughly $4.95 billion, or double the 89 tons imported in July. Russia and other former Soviet countries are also getting in on the buying frenzy, as well as Mexico, all posting ever-growing gold import numbers in 2015. (Source: Bloomberg, last accessed September 30, 2015.)
So let’s take a quick recap of the situation. Gold prices are nearing multi-year lows, but demand for it is basically shooting through the roof.
It doesn’t take an MBA to figure out that something does not quite add up here. When commodity markets are this imbalanced, a market correction is about to take place.
And the Federal Reserve’s impending decision? Well, rather than having a negative effect on gold prices, they might finally put an end to gold’s downward price trend and provide the psychological stability needed for gold to soar.
Think about it this way. The uncertainty surrounding the Fed’s decision is weighing down like a negative cloud over gold prices, depressing investor confidence and keeping market fundamentals from taking hold of the precious metal. Once interest rates are raised, and they are only likely to be raised by a modest amount, gold bulls can breathe a sigh of relief and realize that the sky is not actually falling. (Source: CNBC, last accessed September 30, 2015.)
Here’s the Bottom Line on Gold Prices
When we come to that point, it will be the robust demand for physical gold which is going to provide uplift for the gold price forecast.
Once the cloud of uncertainty is removed from the Fed’s rate hike decision, gold prices just might be set to soar.