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What is the outlook for gold in 2017? After years of declines, all that glittered in the first half of 2016 was gold. But it was a different story in the second half of the year, with gold giving up much of its gains.
Where will gold prices go in 2017? Predicting the price of gold is never easy.
A new U.S. president it about to enter the Oval Office. His policies, while embraced by Wall Street, are untested. Geopolitical tensions are fraught, and the U.S. economy remains fragile, which are all good for gold prices.
At the same time, U.S. economic data is encouraging, stocks are at record levels, interest rates are up, and many believe that Donald Trump’s economic policies will be good for corporate America, which is bad for gold prices.
So again, the predictions for where gold prices will go in 2017 vary wildly.
In 2016, gold prices soared in the first half of the year on fears of a global recession and uncertainty surrounding the Brexit vote. Between January and July, gold prices advanced more than 23% to around $1,380.00 per ounce.
In the second half of the year, gold prices declined slightly on improving U.S. economic data, but cratered after Donald Trump won the election. Gold ended the year up roughly 8.5%. That’s a good year for a commodity like gold, but it still ended the year on a down note.
Most analysts expect gold prices to climb around 13% in 2017, which would lift gold prices to a high of around $1,500. Looking ahead though, there are a large number of factors that could propel gold prices significantly higher than that in 2017.
Investors Sought Safety in Gold in 2016 … and Will Again in 2017
Gold is a hedge against economic uncertainty, and there were more than enough reasons for investors to hedge against political and economic uncertainty in 2016 and protect their assets.
At the start of 2016, investors and central banks loaded up on gold as the markets started to tumble on fears of a global recession. Gold prices got another boost in June when the U.K. voted to leave the European Union (EU).
Will investors turn to gold in 2017? Despite unbridled optimism about President-elect Donald J. Trump and rising consumer confidence, the world is an unpredictable place, and any number of events could send investors flocking back to gold in 2017.
Unexpected outcomes in Hong Kong’s Chief Executive Election on March 26, France’s Presidential Election, with the First Round on April 23 and Second Round on May 7, and Germany’s Federal Election on October 22 could all propel gold prices higher.
There are also a lot of other unknowns that could erupt in 2017 and send gold prices soaring. America’s relationship with Russia and China is icy. The U.S. could enter a trade war with China. Russia could extend its reach into Ukraine, and North Korea could push ahead with its plans to test-launch an intercontinental ballistic missile. Ongoing issues in the Middle East and terrorist attacks could also send current gold bears scurrying back into gold.
Chart courtesy of StockCharts.com
U.S. Economy Remains Weak
Investors flocked to gold to hedge against economic uncertainty in early 2016 on fears of global economic weakness and concerns that the American economy wouldn’t be able to withstand the December 2015 interest rate hike.
Gold prices could trend significantly higher in 2017 if cracks in the U.S. economy start to appear. Well, there are lots of economic indicators illustrating just how fragile the U.S. economy is, but few seem to be paying any attention.
I enter as evidence: in November, the U.S. unemployment came in at 4.6%, with 178,000 new jobs created. Unfortunately, the improved jobs data is a result of a large number of low-paying, part-time jobs. America’s demand for waiters and waitresses continues. Only 9,000 full-time jobs were created, or 180 per state. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, January 6, 2017.)
The number of Americans not in the workforce soared by 446,000 in November to a record 95.1 million. The participation rate hit 62.7%, a little shy of the October 2015 all-time low of 62.4%.
Over the last 10 years, U.S. household debt has soared 11% with the average household owing $132,529.00. U.S. consumer debt is now greater than the $12.37 trillion from December 2007, just before the Great Recession started. (Source: “Household Debt Nears Pre-Recession Levels, Study Shows,” NASDAQ, December 14, 2016.)
The most expensive debt (credit cards) costs the typical household $1,292 annually in interest charges. That debt burden is going to grow with interest-sensitive credit expected to rise significantly in 2017. This will stretch the average American household to the limit. Almost half of all Americans (47%) say they would have to borrow money from family or friends if they had an emergency expense of just $400.00. (Source: “66 million Americans have no emergency savings,” CNBC, June 21, 2016.)
The fact of the matter is, for an economy that is supposed to be in recovery mode, it doesn’t feel like it to the average American. Well-paying, secure jobs are scarce, wage growth is glacial, and being seriously outpaced by inflation. With inflation expected to rise in 2017, this will make it even harder for the average American to make ends meet. Moreover, Americans are shouldering more debt and have little to no savings.
Remember, the U.S. gets more than 70% of its gross domestic product (GDP) from consumer spending. It’s going to be tough for the U.S. to report strong economic data when more and more Americans are in debt and struggling.
Chances are good that the positive sentiment around the raft of so-called good economic data will turn sour in the second half of the year. At this point, the gold price trend will climb higher.
A Strong U.S. Dollar
A strong U.S. dollar is bad for gold. It generally means that the U.S. economy is doing well, which is not good news for a commodity that is seen as a hedge against economic uncertainty. Second, gold is denominated in U.S. dollars. The stronger the dollar, the more gold you can purchase, which leads to lower gold prices.
Further, this past December, the Fed raised its key lending rate by a quarter of a percentage point to a range of between 0.5% and 0.75%. This is just the second time in the last decade that the Fed has raised its rates. Federal Reserve Chair Janet Yellen said the economy has proven to be remarkably resilient and that the hike is a vote of confidence in the economy. (Source: “Federal Reserve Press Release,” Board of Governors of the Federal Reserve System, December 14, 2016.)
In a so-called perfect world, higher rates would mean a stronger U.S. dollar and investors turning their backs on gold. But this is not how it has gone down historically. The Federal Reserve has introduced five major rate increases during recovering, and each time, it results in a lower dollar.
President Trump’s Economic Action Plan
With the U.S. economy already fragile, it remains to be seen whether Trump’s fiscal plan will kick the U.S. economy into high gear, or send it to a grinding stop.
The Organisation for Economic Co-operation and Development (OECD) believes that Trump’s presidency will lead to faster growth, not just in the U.S., but around the world.
The Paris think tank said global growth will pick up faster than expected, thanks to Trump’s planned tax cuts and public spending. It sees U.S. GDP expanding 2.3% in 2017 and 3.0% in 2018. This will, the OECD believes, spill over to the rest of the world. The global economy is expected to grow by 3.3% in 2017 and 3.6% in 2018. (Source: “General Assessment of the Macroeconomic Situation,” OECD, last accessed January 6, 2017.)
As it stands though, no one really knows what Donald Trump’s economic action plan looks like. His campaign promises were pretty benign: cut corporate and personal income taxes, and increase spending, including introducing a $1.0-trillion infrastructure plan.
If Trump’s economic strategy fails to materialize, global growth could be around 0.4% weaker than projected next year and 0.6% weaker in 2018. These results could be even weaker if he implements higher tariffs on imports from China and Mexico and reassesses other trade deals.
Not everyone is as bullish on the U.S. economy as the OECD. The Federal Reserve expects that the U.S. economy will advance just 1.9% in 2016 and 2.1% in 2017. Meanwhile, the International Monetary Fund (IMF) forecasts that the U.S. economy will grow 2.2% in 2017 and 2.1% in 2018. (Source: “World Economic Outlook October 2016,” International Monetary Fund, last accessed January 6, 2017.)
Weak economic growth and rising interest rates could hit the already-fragile U.S. economy hard and send gold prices higher in 2017.
U.S. Stock Market Significantly Overvalued
Nothing sends investors into the safe arms of gold like a stock market correction. It happened most recently in January 2016; stocks tanked and precious metals like gold and silver soared. U.S. stocks are so overvalued right now that they are poised to crash on the first wave of negative economic news, such as falling earnings and revenue.
First, stocks are overvalued because the Fed introduced years of artificially low interest rates though its quantitative easing experiment. By lowering interest rates to zero, the Fed effectively removed “income” from fixed income investments like bonds, CDs, and Treasuries. Income-starved investors and retirees hoping to live on the income from these safe investments were forced to put their money in riskier investments like the stock market.
The bull market is about to enter its ninth-year, making it the second-longest on record. Unfortunately, the S&P 500, the Dow Jones Industrial Average (DJIA), the New York Stock Exchange (NYSE), and NASDAQ are all at record levels, not because of strong earnings and revenue growth, but out of desperation. There’s nowhere else for investors to park their money. Valuations are completely out of whack.
According to the Case-Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which currently stands at 28.2 times average earnings, stocks are overvalued by 76%. The ratio has only stayed higher twice, for longer: in 2000 and 2007. It ended in a crash both times. (Source: “Online Data Robert Shiller,” Yale University, last accessed January 6, 2017.)
The market cap to GDP ratio also suggests that stocks are significantly overvalued. This ratio compares the total price of all publicly traded companies to GDP; it is also referred to as the Warren Buffett indicator, since he calls it the single best measure of valuations.
A reading of 100% suggests U.S. stocks are fairly valued. The higher the ratio over 100%, the more overvalued the stock market. The market cap to GDP ratio is currently at 127%.
The Warren Buffett Indicator has only been higher twice since 1950. In 1999, it came in at 153.6%. In late 2015, it was at 129.7%. It was only at 108% before the 2008 financial crisis.
A stock market crash, even a correction, will send investors flocking back into precious metals and send gold prices soaring.
Gold Price Predictions 2017
Right now though, thanks to the growing optimism, gold is out of favor. Chances are good that the hope and optimism around Trump will be front and center in the first quarter of 2017. This will lead to depressed gold prices. But look for the gold price trend to reverse in the second quarter.
Currently trading near $1,180 per ounce, gold is trading in an attractive range and is poised for further growth as 2017 unfolds.