Three Reasons to Watch Gold Prices Closely for 2016
Gold prices could see a massive move to the upside in 2016. There are three reasons why this could happen: a U.S. dollar decline, global economic collapse, and money printing becoming prominent once again.
Know this: gold prices and the U.S. dollar have an inverse relationship, meaning that if the U.S. dollar increases in value, gold prices decline. This exact relationship has been in play since March of this year.
Now, we see the dollar is declining. Please look at the chart below of the U.S. Dollar Index. It tracks the value of the U.S. dollar compared to major global currencies.
Chart courtesy of www.StockCharts.com
As you can see, since March, there has been an established downtrend on the U.S. dollar; it’s declining compared to other currencies. Furthermore, looking at it from a technical perspective, it also trades below its 50-day moving average (blue line in the chart above) and its 200-day moving average (the red line). At the very core, these lines tell that the dollar is breaking below its intermediate- and long-term trends, and more of the same could follow.
This is great for the precious metal. If the U.S. dollar continues to trend lower, gold will rise in value.
Global Economic Uncertainty: Reason to Own Gold?
Next, there’s the global economy. No matter how you look at it, global growth is slowing down and uncertainty is growing each day.
Not too long ago, we found that China is growing at its slowest pace since 2009. Even worse, conditions in the second-biggest country in the global economy are expected to decline. I have heard estimates for the Chinese economic growth rate to slow down to as low as four to five percent.
Organizations like the International Monetary Fund (IMF) have been continuously reducing their guidance on global growth and I wouldn’t be surprised if these forecasts are revised even lower.
When the global economy struggles, no one really knows what could be the next step. Thanks to globalization, every country is connected extensively. This creates uncertainty for investors but gold thrives in this environment. It provides safety when investors are unsure about other asset classes.
As global uncertainty increases, it could generate significant interest in gold.
Money Printing to Make a Comeback; Gold Prices to Shoot Higher?
Last but not least, in the global crisis of 2009, we saw one phenomenon prevail: central banks printing and lowering interest rates to fight the economic slowdown in their countries. Investors must ask: with the local economy struggling, won’t the central banks around the world print again?
We know the European Central Bank (ECB) is already printing and has set its few key benchmark interest rates to negative. The Bank of Japan is printing as well.
Who could be next? There’s noise the U.S. could be doing a fourth round of quantitative easing and keeping the interest rates low. There are also speculations if China will print and lower its rates further. Canada has already lowered its rate and may reduce it even further soon. Keeping it short, the list of central banks lowering their rates and/or printing money has been growing.
We saw this scenario play out in 2009. It could very well play out again. Gold prices will be the biggest beneficiary if central banks do as expected. When there’s too much money chasing the same amount of goods, gold prices shoot higher.
Where Will Gold Prices Be in 2016?
As I see it, the stage is set for gold prices to see a massive rally in 2016. As I have said before, don’t expect much but base-building for the rest of 2015; 2016 will be the year when gold prices will surprise investors.
With all this said, watch out for gold miners. If gold prices shoot higher, they will generate massive returns for your portfolio.