What You Really Need to Know About Gold Prices
One of the major factors keeping gold prices suppressed these days are inflation expectations moving forward. With this, investors are concerned the yellow precious metal may not even be worth a first glance.
Without studying all the details, please take a look at the chart below. At the very core, it plots what the market expects average inflation to be in the next five years.
As it stands, the markets expect inflation to be around 1.1% over the next five years. Considering the above chart, it’s very evident that these expectations for inflation have collapsed over the past five years. In April of 2011, they expected inflation to be more than 2.4%.
To add to the misery, the government’s inflation figures are just making the market’s belief much stronger. In fact, we are hearing a significant amount of noise suggesting deflation—a period in which prices decline—could be the case.
Just recently, the Bureau of Labor Statistics (BLS) reported that inflation in the U.S. economy in 2015 was just 0.4%. (Source: “Consumer Price Index – All Urban Consumers,” Bureau of Labor Statistics, last accessed January 21, 2016.)
What does this mean for gold prices?
You see, gold is considered as one of the best hedges against inflation, and if it’s expected to remain subdued, do you really need to own the precious metal?
Two Reasons Why Gold Prices Could Skyrocket
When it comes to gold, investors really need to look at just two things: demand and supply. As it stands, the demand and supply metrics for the gold market remain severely distorted. If this continues, you won’t even need higher inflation to take gold prices higher.
What you need to know is that gold production is declining. According to Thomson Reuters GFMS, gold production is expected to decline by three percent this year.
We are seeing pessimism from miners, too. The CEO of Gold Fields Limited (ADR) (NYSE:GFI), Nick Holland, told Financial Times, “We were all talking about how production was going to increase every year. I think those days are probably gone…you are not going to see massive production increases in the industry.” (Source: “Gold miners say output has peaked as losses reshape the industry,” Financial Times, January 17, 2016.)
Mind you, Gold Fields isn’t the only company that has mentioned lower production. There are several other companies that have resonated a similar opinion and this list continues to grow.
On the demand side, the buyers remain in huge numbers and it is very evident that they don’t really care for where gold prices stand. We see buying in India and China, at mints around the world, and by central banks.
Recall one of the basic rules of economics: when demand increases and supply declines, you get higher prices.
Gold Price Outlook for 2016
The mainstream will have you convinced that inflation is the only thing that should be watched when it comes to the gold market. Don’t buy into this narrative at all. There are other factors at play—particularly demand and supply—and they make the precious metal look undervalued.
Know that since the beginning of 2016, gold is one of the only asset classes that haven’t declined. Across the board, we see misery. I remain optimistic towards gold prices. I will not be shocked if this year we see these precious metal prices increase and the gold bull market that began in 2002 resume.