According to Thompson Reuters’ GFMS Gold Survey, gold prices are likely to rise above $1,200 per troy ounce in 2016. That’s good news for for gold investors; demand is finally picking up again.
In 2015, global gold demand fell by 2.1% year-on-year, gold jewelry demand declined by 3%. Thompson Reuters says, “global gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving global fundamentals.”
The major factors driving global gold demand are U.S. interest rates, the emerging markets crisis, falling mine output and market panic.
Fed will mostly likely not hike rates as fast as expected; however, the market has already priced in further rate hikes
One reason why gold will gain momentum in 2016 is that U.S. rate hikes arrive more slowly than expected. Additionally, the latest developments in China could motivate the Federal Reserve Bank (Fed) to postpone further rate hikes.
“The market has been arguably pricing in four U.S. rate rises this year. However, given a weak economic recovery and highly accommodative stance of monetary policies outside the United States, we are likely to see only two small rises. This should again stimulate prices,” write the GFMS analysts.
If interest rates are low, investors prefer to buy gold bullion, because yielding assets are less attractive. Additionally, gold is priced in U.S. dollar and higher interest rates would lead to a stronger dollar.
Economic slowdown in China and yuan weakness will increase demand and stimulate gold prices
Besides US monetary policy, the recent developments on the other side of the planet have an effect on global gold prices as well. Concerns over economic growth in China and the weak yuan stimulate Chinese gold demand, because investors prefer to invest in the precious metal.
“Today gold is considered to be a natural hedge against world inflation and in the last few years together with crude prices and other metals was highly correlated with world global growth, especially in emerging markets,” says the online broker 10Trade.com.
Inflation and recession fear will drive up prices in the medium term. As a result of the price stabilization, investors will come back into the market and prices will increase further. Thompson Reuters expects gold prices reaching more than $1,200 an ounce by the end of the year. Currently, gold is valued at around $1,100 an ounce.
Russia’s economy is shrinking and the ruble has devalued significantly; investors are getting their money out of the country and the central bank is buying gold
China is not the only emerging economy in trouble. Russia’s GDP fell 3.7% in 2015 and the outlook isn’t good. According to the IMF, Russia’s economy will remain weak in 2016. Falling oil prices will continue to be a significant drag on Russia.
Additionally, the Russian ruble is in a free fall which has pushed gold prices in rubles to a record high. Therefore, the Russian central bank has continued to buy gold in December to support its crashing currency.
Gold demand has been shrinking in 2015, while mine output has edged up; however, that has changed in Q4 2015
The largest factor of gold demand is jewelry fabrication. Last year, industrial demand has fallen by almost 4% while output from mines and recycling has been increasing. This supply surplus has lead to falling gold prices in 2015.
However, these factors could change in 2016. Mine supply has declined in the last quarter of 2014. In fact, this has been the largest decline since 2008. Additionally, the relatively low gold price is stimulating retail demand and the central banks of the largest economies are buying gold as well. Hence, supply will continue to drop and demand is on the rise. If you are a gold investor, this is good news for you.
Market panic and fear of recession is fueling gold demand; investors are fleeing into cash and real assets
Besides fundamental factors, fear and panic are major drivers of gold prices. Analysts predict that 2016 won’t be a year of promising returns and investors are fleeing into cash and real values. Cash, however, doesn’t yield any return and doesn’t offer protection in case of a systemic crash.
Real values, especially gold, have a proven record of offering sufficient protection during financial turmoil. As investors are having a hard time to predict whether or not the financial system is in danger, even the slightest sign of a large-scale crisis could lead to a significant increase in gold prices.