As it stands, gold has a huge “sale” sign on it. Mark these words; the yellow metal is presenting a great opportunity.
When looking at the precious metal, investors have to think long-term, and not about where the prices will be next week or next month.
Right now, gold seems significantly undervalued for three main reasons; uncertainty about U.S. economic growth is increasing, the global economy is suffering, and the bond market is going through a mini-crash.
Also Read: Top 4 Gold Stocks of 2015
Will Gold Rise as the U.S. Economy Tumbles?
In the first quarter of 2015, the U.S. economy contracted at an annual pace of 0.7%. (Source: Bureau of Economic Analysis, May 29, 2015.)
Looking into the details; they were gruesome.
For instance, personal consumption increased only 1.8% in the first quarter. In the fourth quarter of 2014, it increased by 4.4%. Saying the very least, the biggest factor of the U.S. gross domestic product (GDP) calculation is slowing down.
Thanks to the rising dollar, exports were in a slump, too. Exports declined 7.6% in the first quarter. In the fourth quarter of 2014, exports from the U.S. economy increased by 4.5%.
Going forward, things don’t look so bright for the U.S. economy either. Economic data is just getting worse. Across the board, it’s coming in below the expectations.
If the U.S. economy slows down after the U.S. government has spent so much money, and the Federal Reserve has printed money, it will be a significant drain on confidence. Both have tried to sell the idea that the U.S. economy is just fine and improving. The reality is the complete opposite.
As confidence breaks, it will lead to uncertainty. Gold, in those periods, does very well.
Global Economy Struggling
If you pay close attention, the global economy is currently struggling to grow. The major economic regions are reporting sluggish economic data.
Consider China, for instance. The second-largest economy in the world is going to report a growth rate that’s outright embarrassing when looking at its historical averages. This will be the worst it’s been in several years. In addition to this, there’s a possible financial crisis in the country that’s also brewing.
The eurozone remains in trouble as well. Nothing has really changed. Greece still continues to threaten the region and many are questioning its breakup. Mind you, nothing has really changed in Spain, Portugal, or Italy either. These troublesome nations are still facing headwinds.
Remember this; as bigger nations slow down, the smaller nations will follow the same direction since they heavily rely on them.
As troubles in the global economy brew, investors who have bought stocks in hopes for global growth will be disappointed. Again, the yellow metal will be the best place to park money.
Bond Investors Running for the Exit
Over the past few months, the fear of the Federal Reserve raising rates has spooked bond investors. Note that rising interest rates are bonds’ biggest enemy. Currently, the market expects the Federal Reserve to raise the federal funds rates in September. Just look at the yields on the 30-year U.S. bonds below. As bond prices decline, yields go up.
Chart Courtesy of www.StockCharts.com
Yields on the 30-year U.S. bonds have jumped close to 40% since February, standing at the highest level of 2015. From a technical point of view (looking at the price action), yields can rise even more.
This is massive. As interest rates declined, investors jumped into bonds. Now, the Federal Reserve says it will raise rates and investors are front-running the hike decision; selling their bonds.
If this continues, it will drive bonds investors into safe assets—gold.
Where’s Gold Headed Next?
Over the last two months, gold prices have been trading in a range. As I see it, there’s solid support at the level gold currently trades. This year, I will not be surprised if the yellow metal stays in a range, but ends on a slight positive note.
I believe 2016 will be a very interesting year for the yellow metal. I expect the prices to rise and this slump to end. The reason I believe this will happen is because we will know how the U.S. economy reacts to the interest rate change, there will be complete data on how the global economy is doing, and investors will be faced with reality. Thus, their complacency will end.
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