Federal Reserve, ECB, China to Drive Gold Prices Upward in 2015
Uncertainty and fear are two of the biggest factors that move gold prices. If they increase, investors buy the yellow metal to hedge and protect their wealth. Going into 2015, I see these two factors coming into play and taking the precious metal’s prices higher.
At the very core, I am watching three events that will bring uncertainty and fear going into next year:
- The Federal Reserve’s move towards normalizing monetary policy and raising interest rates
- Problems in the eurozone and the European Central Bank’s quantitative easing
When Interest Rates Rise, Gold Prices Go Down?
If the Federal Reserve moves ahead with its plan to move interest rates higher, know this: It will be the first time—in a very long time—that the lending rates have risen in the U.S. economy. Over the years, investors have become far too addicted to low interest rates. From my perspective, it will be hard for investors to adjust to these changes. With this you should expect a sell-off in assets across the board as investors flee towards safety.
But, there’s still a big question regarding the shift in the Federal Reserve’s interest rates policy. To date, the Fed has “hinted” that it will be raising interest rates sometime in 2015; it’s far from confirmed that this is the action it will be taking, yet.
Looking at the markets currently, be it stocks or bonds, investors are still betting that interest rates won’t rise. For example, while the key stock indices continue to make new highs, bond yields remain very low. Please see the chart below of the 10-year U.S. Treasury note yield; it’s been trending lower since the beginning of the year.
Chart courtesy of www.StockCharts.com
If interest rates don’t move higher, then it’s bullish for gold as well. This is because when interest rates remain low, the value of real assets, like gold, increases.
In simple words, no matter what the Federal Reserve does, its actions will turn out to be bullish for the precious metal.
Gold Forecast Bullish for 2015-2016 by Michael Lombardi
Quantitative Easing Soon to Arrive in the Eurozone
The United States Federal Reserve isn’t the only central bank painting a bullish picture for gold, though; the European Central Bank (ECB) is doing the exact same thing.
Some time ago, the ECB said it would do whatever it takes to save the eurozone. Sadly, nothing has really changed in the common-currency region. The eurozone remains a troubled spot—countries in the region, big or small, are showing signs of severe economic stress, and it’s only expected to get worse.
To fight these problems, the ECB has lowered its interest rates, but this wasn’t effective. With this, I hear a significant amount of noise going around that’s suggesting there will soon be quantitative easing coming to the eurozone. In other words, the central bank will print money and buy bonds.
And as you can imagine, as the value of the euro declines as a result of quantitative easing, this will only cause gold prices to move higher.
Another place in which I see fear and uncertainty forming is China. The country is in deep trouble and headed for a slowdown. This year, the Chinese economy is expected to show its worst performance in many years. And next year’s economic trajectory is only expected to slow even further.
The trade data out of the country continues to disappoint. The housing market in China is worrisome, and the amount of bad debt keeps on increasing. But as problems in the Chinese economy grow bigger, it will send waves of uncertainty throughout the global economy. Once again, this will build bullish sentiment in the gold market.
Gold Outlook for 2015
In 2013, the gold market was severely punished. In 2014, so far, it looks to be a positive year. To me, going into 2015, it will not be a surprise if we start to see the yellow metal start following its long-term trend and move to the upside.
With this, I see the overall mining sector as oversold. There’s a lot of value, and I believe investors could make huge returns in this area.