Demand to Send Gold Prices Soaring
Gold prices struggled to find a bottom last year, but the tables have turned in 2016.
This year is turning out to be a blessing for the gold bugs. While the equity markets face severe volatility and bond markets dry up, gold seems to have piqued investor interest. Gold prices have shot back up to their early-2015 highs and the momentum is continuing for the gold price outlook in 2016.
One indicator in particular confirms that gold prices will likely see more upside this year.
Note that a popular gold exchange-traded fund (ETF) saw an unprecedented demand for its shares last week, so much so that the issuer had to suspend the new issuance of shares. Why did this happen? Because demand for the precious metal rose faster than the ETF manager had expected.
BlackRock—the supervisor of iShares Gold Trust (ETF) (NYSEArca:IAU)—revealed last week that the fund saw massive demand for its shares. (Source: “Gold Demand Trips Up BlackRock as ETF Halts Share Creation,” Bloomberg, March 4, 2016.)
iShares Gold Trust is one of the two most popular physically backed ETFs—the other being SPDR Gold Trust (ETF) (NYSEArca:GLD). Take note that physically backed ETFs are backed by physical gold as the underlying asset, such that shares are issued against the equivalent value of real gold.
High demand for physically backed gold ETFs can only mean one thing: that demand for physical gold must also go up, in turn pushing up the price of the yellow precious metal.
So why exactly is there a sudden surge in demand for gold? One reason: a global economic slowdown!
Economic data coming out of all major economies of the world suggest that growth is losing its pace. Take the eurozone that is struggling with deflation, for example. The European Central Bank (ECB) has done everything in its capacity to boost inflation, but it has failed. Even a negative interest rate policy (NIRP) failed to trigger economic activity in the region.
The Bank of Japan’s negative interest rate policy is likewise failing. Japan’s economy is shrinking on the back of slowing consumption. Exports are falling and so is its gross domestic product.
In China, which is often touted as the fastest-growing economy, things are not looking rosy anymore, either. The latest data released this week revealed that Chinese exports are declining on the heels of a global economic slowdown. (Source: “China’s Exports Tumble Amid Broad Slowdown,” The Wall Street Journal, March 8, 2016.)
In fact, the odds of a U.S. recession this year are higher than ever since the Great Recession. Big banks like Bank of America, JPMorgan, and Deutsche Bank are now predicting an economic recession.
In times like these, investors start moving their money to safer havens. Gold is, hands down, their first option. We saw a trailer for this episode in January, when the Chinese markets crashed, followed by market corrections in Europe and the U.S. Gold prices soared as investors started converting their investments into gold.
The global economic slowdown is now more imminent than ever. It’s almost certain that gold will continue to see strong demand from investors fleeing the equity and bond markets. Case in point: gold prices will continue to go nowhere but up in 2016.