So far in 2016, gold prices are up 3.4%. Meanwhile, the Dow Jones Industrial Average is down 7.7%. Don’t be surprised if this trend (gold prices moving higher, stocks moving lower) continues throughout the year, with gold prices ending 2016 much higher than they are today.
Dow-to-Gold Multiple on Strong Rebound
Below is a long-term chart of the Dow-to-gold multiple. This chart shows how many ounces of gold are needed to buy a unit of the Dow Jones Industrial Average index.
As the chart illustrates, since late 1999, the number of ounces of gold needed to buy one unit of the Dow Jones Industrial Average had been falling. However, that trend changed in late 2011. It now takes about 15 ounces of gold to buy one unit of the Dow Jones Industrial Average compared to more than 40 ounces in 1999.
I expect the number of ounces of gold needed to buy one unit of the Dow Jones Industrial Average to fall to single-digits like it did between 1979 and 1998. Why? Because gold prices have been stagnate since 2011 and are now rising due to supply constraints and strong demand.
Chart courtesy of www.StockCharts.com
On the other hand, corporate profits and revenues are contracting quarter after quarter, while the world economy is stalling even after all the money printing and record-low interest rates. These signs are consistent with our forecast that 2016 will be a terrible year for the stock market.
How High Could Gold Prices Go?
When it comes to the fundamentals of gold prices, they have been and continue to be nothing but impressive.
Sales at the U.S. Mint are robust. In the first few weeks of 2016, the U.S. Mint sold 95,500 ounces of gold in American Eagle coins. In the entire month of January 2015, the mint sold 81,000 ounces of gold in American Eagle coins. (Source: U.S. Mint, last accessed January 20, 2016.) Compared to the same period in 2015, demand at the U.S. Mint is already 18% higher this year.
And central banks continue to buy the precious metal. Watch for central banks from emerging and developing economies; they lack gold and need more of it. The central banks of China and Russia, combined, bought more than 200 tonnes of gold bullion between July and November of 2015. (Source: World Gold Council, January 13, 2015.) Central banks have now been net buyers of gold for years.
Gold Prices Outlook for 2016
Going further into 2016, I remain very optimistic toward gold prices. As stocks continue to slide lower, we could see a flight towards safety that could result in much higher gold prices.