We all know that when global markets start getting flakey, people tend to buy gold. Everyone’s big question is what’s going to happen to gold in 2017?
2016 in Brief
The first two quarters of 2016 saw a steady rise for gold. It went from just over $1,050 per ounce two over $1,350 per ounce. In the third and fourth quarter, Gold fell to around $1,150 per ounce.
Most of the gold market is based in two areas: investor demand, and jewellery. In many ways, these overlap. In many eastern countries, high karat gold jewelry seen as securing long-term, safe value. This value is measured against the returns of what our otherwise perceived to be risk-free investments, for example, US T-bills (treasury bonds). When Global markets ramped up and interest rates, correspondingly increase, the opportunity cost of buying gold in Toronto, or elsewhere, increases. Some people choose to sell gold jewellery when they think the economy is doing better. The assumption is that they have a better place to put that money.
Considering those factors, the decline in gold values after Q2 2016 is put into perspective. How can we use that to think about 2017? Here we turn to one of the strongest fundamental economic forces, expectations.
Expecting Gold in 2017
The US economy is currently in a bull market. The Trump election appears to have bolstered expectations for business. Like all bull markets however, the problem tends to lie in peoples positive expectations running too far. They think that it will go on forever. On the other hand, when times get tough, people tend to panic. It’s at that point that you want two things: to buy equities, and have owned gold.
Why you should buy in a bear market needs no explanation. On the other hand, you want to own gold because of the same panic that causes equities to be priced underneath intrinsic value. That panic since people to the least (perceived) risky investment. That’s where gold comes in. For example, incoming president Trump may during 2017 be perceived as acting in a way detrimental to US business interests. Imagine, further, that geopolitical uncertainty causes international panic. Either of these “macro” factors could send investors running to buy gold as they did in the 08/09 recession. The Federal Reserve is the central bank that controls overnight US interest rates (thereby setting broader lending rates). If the Fed does not continue with recent increases in interest rates, expectations of long term balance sheet problems may also be a boon for gold investors.