When it comes to stocks and bonds, they may be fairly easy to price at times. This is mainly due to the fact that they make dividend or coupon payments to investors. Gold, on the other hand, is different and can be very difficult to price, since it doesn’t make any payments.
To look at where gold prices may be headed next, I look at a few factors including inflation and money supply, along with overall economic conditions and the level of uncertainty. When I do just that now, I continue to be optimistic towards the yellow metal.
As it stands, there’s a significant amount of noise that suggests the U.S. economy will experience deflation—a period when the prices of general goods decline. As a result, many investors don’t like the precious metal. It does tend to perform horribly during times of deflation.
Looking at the data, this may very well be the case. If you look at the monthly inflation data, it suggests that the U.S. economy, between August and November, witnessed deflation of roughly 0.4%.(1)
However, currently, major central banks around the world are busy printing money or are contemplating it. The Federal Reserve is the only central bank that’s trying to put the brakes on its easy monetary policy. This phenomenon will eventually catch up. Remember: the more of something there is, the lesser its value—it’s basic economics. As more money is printed now, it will be worth less in the future. That means it is highly likely we’ll see higher inflation.
Sadly, too often, investors forget one important fact about gold: it can be called the global currency. The yellow metal is used everywhere in the world as a hedge against inflation. Lucky for gold, central banks appear to be continuing with their easy monetary policies—at least in the near-term.
Global Economic Conditions and Uncertainty
The economic situation in the global economy is also destabilizing very quickly. As I have mentioned here before and what’s worth repeating is that the global economy is going the wrong way and a severe economic slowdown shouldn’t be ruled out. If only a few of the biggest economic hubs in the global economy suffer, the smaller ones will eventually follow suit, as they heavily rely on the larger economies.
At this instance, it seems the U.S. economy is the only economic hub that’s showing improvements. Economic data is getting better at home; however, other major economies, like China, the eurozone, and Japan, are struggling to grow. It is too early to provide any numbers, but it wouldn’t be surprising to me if the current projected rates for global growth are revised much lower. Economic activity is losing momentum very quickly.
When I look at the indicator that can provide us with an idea about where the global economy may be headed, it is suggesting a slowdown is becoming imminent.
With this said, there’s been an argument going around that says the growing U.S. economy may be able to hold the global economy strong.(2) But I disagree with this completely. Sure, the U.S. is a major player in the global economy, but on its own, it can only do so much.
Mark my words: if we continue to keep going at this pace, all of these problems in the global economy are going to create uncertainty. At the end of the day, this may be bad for the U.S. economy, but it’s great for gold, as the precious metal rises when uncertainty increases.
Gold Worth the Investment?
From my perspective, gold is at least worth a look. It may not pay-off as much in the short-term, but its long-term growth looks solid. Since the beginning of 2015, we have seen precious metal prices increase. This momentum can continue further into the year if the problems in the global economy continue and central banks keep on doing the same—printing money and hoping things will eventually get better.