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Gold Outlook for 2017 – Part II: Low: $1035, High: $1401, Close: $1242
The books are now closed on 2016. Gold began the year at $1,060, peaked at $1,366 in July and fell to $1,151 at year’s end for a net gain of +8.6%, not far behind the S&P 500’s 2016 gain of 9.5%. Both were beaten by the Dow Industrials, which gained 13.4% and gold’s country cousin, silver, which rose 14.5%.
The British “Brexit” vote on June 23 sent gold soaring and 10-year Treasury rates falling to record lows. Gold stayed above $1,300 into early October, based on the Federal Reserve’s procrastination over interest rate increases, but after the surprise election of Donald Trump and a Republican Congress on November 8, the economy seemed to recover and the Federal Reserve finally raised rates 0.25% in mid-December.
The Fed’s latest statement indicated that they could raise rates two or more times in the coming year, and that has pushed gold prices down. But that is also what they said when they raised rates in December 2015. I can see a plausible scenario whereby 2017 may look a lot like 2016, with the Fed backing away from its interest-rate promises once again, sending gold back up to $1,300 and maybe $1,400 in 2017.
Five Indicators Pointing toward a Gold Surge in 2017
First, let’s take a look at the latest GDP projections for the fourth-quarter, just ended. Economists are now estimating that fourth-quarter GDP will grow at a much slower annual rate of 2.4% (vs. a revised 3.5% in the third quarter). In late December, the Conference Board announced that the Leading Economic Indicators (LEI) were unchanged in November. Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, said that “the underlying trends in the LEI suggest that the economy will continue expanding into the first half of 2017, but it’s unlikely to considerably accelerate.”
Consumer confidence is soaring – and that is why stocks are up and gold is down – but this confidence could reflect an unreasonable hope that the new President can turn the economy around quickly. If so, he will be fighting the head winds of a strong U.S. dollar, which will hurt U.S. exporters. The late-December economic indicators are not encouraging: Personal Income rose by only 0.2% in November, and Durable Goods orders declined 4.6% in November, the first decline in five months, even though “core” orders rose 0.9%. Overall, as we move into 2017, our GDP appears to be still growing, but at a slightly slower pace than in the third quarter. This means the Federal Reserve may delay rate increases, like they did in 2016.
Second, the proposed Trump spending programs – like a proposed trillion-dollar infrastructure bill and a proposed border wall – might push the U.S. budget deficit past $1 trillion per year again, as happened in each of the first four years of President Obama’s administration. President-elect Trump might not be able to push much of his agenda forward without running up huge budget deficits. We are already seeing some bi-partisan resistance. Both Parties are asking how he intends to pay for massive infrastructure programs with “revenue-neutral” financing. Outgoing Treasury Secretary Jacob Lew has warned the Republican Congress that they should not ignore how their proposed tax cuts would impact the federal budget deficit.
Historically, as I showed in Part I of this series, gold tends to rise when U.S. budget deficits rise. The U.S. budget deficit has already widened by 34% to $587 billion in fiscal 2016, after declining for five previous years. The rising costs of Obamacare may or may not continue, depending on whether Trump repeals, replaces or merely repairs Obamacare, but there’s not much Trump can do to stop the rising costs of Social Security, Medicare and Medicaid, since most Baby Boomers will turn 65 before 2025.
Third, and perhaps most important, world tensions are growing. New (especially new and inexperienced) Presidents are often tested severely in their first year or two in office. Recall John F. Kennedy’s debut, when the Bay of Pigs made him look weak, so Khrushchev bullied Kennedy at the Geneva summit and then tested the young President by shipping missiles to Cuba. Recall the peanut-farmer President Jimmy Carter, who let Russia’s Brezhnev expand the Soviet empire into nearly every continent on earth. Just five months into George Bush, Sr.’s term, China cracked down on protestors in Tiananmen Square, and the toughest test of all came early in George W. Bush’s term with the attack on American on 9/11/2001.
We’ve already seen tensions rise between the U.S. and its major rivals, China and Russia. Donald Trump may not be ready to confront seasoned global strategists like Vladimir Putin of Russia, or China’s Xi Jinping, not to mention the dangerous young North Korean dictator who controls nuclear-tipped missiles. Trump immediately faces a refugee crisis in Syria and threats from ISIS and other Mideast extremists. Gold is a proven “crisis hedge” when foreign conflicts erupt, so we could see a sharp rise in gold soon.
Fourth, gold remains an “inflation hedge,” and we have been seeing consumer and producer prices rising at a 2% rate again. Some of Donald Trump’s expansive spending policies could push the rate of inflation even higher. Specifically, the Producer Price Index (PPI) rose 0.4% (a 4.8% annual rate) in November. In the past 12 months, the PPI has risen 1.8%, the fastest 12-month rate of wholesale inflation since mid-2014. The Consumer Price Index (CPI) is also up 1.7% in the past 12 months and – like the PPI – it is running at the highest full-year rates in two years. More inflation increases could push gold up again.
Fifth, supply and demand trends are tipping in gold’s favor. The central banks of Russia and China have been accelerating their purchases of gold, even while the governments of India and China (the two top nations for physical gold demand) have tried to limit their citizens’ ability to buy or trade gold freely. These policies are very unpopular and will likely be reviewed or repealed in the New Year, opening up new avenues of gold demand. In the west, gold ETF and futures markets tend to be the “tail that wags the dog” of gold demand. Gold ETF demand has been way down since November 8, but trading momentum can turn on a dime when investors see the beginnings of a new rise in gold prices – for whatever reason.
In October 2016, Russia bought 40.4 metric tons of gold, its largest monthly purchase since 1998, and in November, Russia bought 31.1 more metric tons. Russia has quadrupled its gold horde since 2006.
As for gold supply trends. new gold supplies from mining operations likely peaked in 2015 (we won’t know the full facts until March), creating a potential supply squeeze on gold if demand picks up in 2017.
The Arc of Gold Prices in 2017 – a Replay of 2016 (only Higher)
As we enter the New Year, gold is struggling to make a bottom. The U.S. dollar is strong, pushing the price of gold down in dollar terms. For that reason, my colleague Ivan Martchev has predicted that 2017 will be the year gold drops below $1,000 per ounce. He may be right, but I doubt gold will fall that far before rising again. He points out that gold is still a good long-term investment, despite its potential to fall nearly 50% within a long-term bull market: Gold fell from $190 in late 1974 to barely $100 in 1976.
That historical example from the 1970s is very encouraging. If you look at the details, gold peaked at $195 on December 30, 1974 (based on the London pm fix that day). Then gold fell almost 50%, reaching a London pm price fix low of $103.50 on September 25, 1976. Back then, $200 gold seemed like a gold price ceiling, while the fear of falling below $100 created a psychological “floor” for gold in late 1976.
If you multiply these prices by 10, we can see why gold has a good chance of staying over $1,000 this time. Gold peaked at around $1,920 in September 2011 and it has since fallen as low as $1,049 in late 2015. As it turns out, there was a huge psychological barrier at $2,000 gold in 2011. At the low end, I think $1,000 will be a psychological “floor” for gold – as $100 was in 1976. Since gold bottomed at $103.50 in 1976, I’ll pick $1,035 as its floor in 2017. One reason I’m saying this is that I think we will see many long-term investors buying in at any price below $1,050. I must also add that buyers in India, China and the rest of Asia are also very price-sensitive and will buy more gold at prices near $1,000.
If gold’s $1,000 floor can hold this time around – as $100 held in 1976 – then I believe that gold can make an assault on $1,400, based on the five fundamentals I’ve outlined above. The impetus could come from a slowing economy, delayed rate cuts, a new war in the Middle East, soaring budget deficits, gridlock in Congress, rising inflation, a loss of the initial “honeymoon” sentiment for Trump, or saber rattling by Russia, China or North Korea. On top of rising demand and shrinking new supply, the gold market is narrow enough to create a peak around $1,400 in mid-2017 and a year-end close around $1,240, up another 8%. In other words, we could see a repeat of 2016, but ratcheted up to a higher high and close.
At Navellier Gold, we don’t obsess over daily or even annual price swings. We believe in buying and storing gold for the long-term as a prudent portfolio balancing strategy. We recommend most investors hold the lion’s share of their wealth in carefully-selected stocks and sectors, while maintaining a 5% to 10% position in gold and silver bullion coins for balance. When stocks fall, gold tends to rise, and vice versa, so it’s comforting to know you own a significant portion of gold as portfolio “insurance” against whatever the world can throw at you. In 2017, the world is likely to throw a lot more surprises our way!
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