These 4 Factors Holding Back Gold, Will Likely Start Benefiting the Yellow Metal
With all the speculation surrounding gold prices, one report claims that it likely has nowhere to go but up. Read why here.
This week, Your News to Know brings you the most relevant news stories about the state of the gold market and the overall economy. Stories include: Why gold might finally be nearing a bottom, 3 reasons to be bullish on gold in 2016, and Lawrie Williams’ take on gold in 2016.
The case for why gold could finally reach its bottom
In a recent email interview with Myra Saefong of MarketWatch, George Milling-Stanley expressed his thoughts on the road ahead for gold. Milling-Stanley is no stranger to precious metal and its dealings, being the head of investment strategy at State Street Global Advisors.
Much of the interview revolves around a single question: Could gold finally be nearing its bottom? Milling-Stanley believes that it might very well be and provides some solid arguments in favor of this.
Ever since 2013, gold has been bouncing back and forth inside a price range of $1,050-$1,350. It has thus far been unable to break past the upper limits of this range despite record sales of bullion coins – Milling-Stanley believes four factors are preventing a breakthrough, each of them being equally effective: The dollar’s strength, the continued absence of inflation, the strength in U.S. equities and complacency in the face of risk. The latter became especially pronounced in the wake of attacks in Paris, as gold remained in the same spot despite its status as a safe-haven asset. For the time being, gold is locked within its range, but eventually each of these four factors will change favorably for the metal.
And what about the lower end of the range? Milling-Stanley doesn’t think the metal can go much further down, insisting it’s near its bottom and dismissing the possibility of an interest rates hike having any lasting impact: “There may be a short-term, knee-jerk downward move when higher interest rates become a reality, but I do not expect higher interest rates to exert any sustained downward pressure on gold prices,” he says. The main reason for this is simple: The current gold price already takes a rates hike into account as if it had already happened.
For gold to dip past $1,050 in any relevant way, significant weakness would have to occur in internal market fundamentals (the balance between supply and demand). “It is difficult to imagine where such weakness might occur,” Milling-Stanley notes, adding that any of the aforementioned four factors becoming more pronounced is similarly “hard to envisage”.
3 reasons to be bullish on gold in 2016
Despite HSBC’s recent bearish stance on gold, the firm is now calling for a bounce back in 2016. As reported by Jonathan Ratner on Financial Post, chief HSBC precious metals analyst James Steel has given us three good reasons to get more bullish on bullion.
The first comes in the form of emerging-market demand: Together, China and India account for nearly two-thirds of global gold consumption and are expected to further increase their buying in the future. Steel reminds us that emerging-market investors are sensitive, staying away when gold nears $1,300 and flocking to it as it moves around $1,100.
The second reason is the expected rally of the euro versus the dollar, as gold has been known to have an inverse relationship with the greenback. Despite a possible rates hike, the dollar stands to weaken either due to a shortened tightening cycle by the U.S. central bank or a reversal of its tightening policies caused by low inflation or weak growth.
Lastly, Steel forecasts that gold exchange traded funds (ETFs) will become net buyers again after three years of selling, and also expects net positions in areas such as the COMEX to rise.
Lawrence Williams asks: What will gold do next year?
As retail holiday events take their turns ahead of the fast-approaching 2016, Lawrence Williams asks an important question: What will the yellow metal do next year?
On Sharps Pixley, he contrasts the view of analysts in a negative-tone within a Wall Street Journal (WSJ) article with any number of different situations that could benefit the metal. One important point to remember: The dull and pessimistic prediction seen on WSJ still isn’t bad for gold at all.
The bank analysts polled by WSJ generally agree that gold should have a flat upcoming year with an average price of $1,114 an ounce, but seemingly fail to acknowledge that this ‘bleak’ outlook is actually an improvement over the current situation and seemingly guarantees a slightly-better year for the metal.
But what if things take a turn for the unexpected – could gold go much higher than intended? Demand has certainly been on the increase, with both India and China (the world’s largest consumers of the metal) seeing record imports. Central banks further drive demand for physical gold up by buying what Williams estimates could be 400-500 tons a year. When coupled with low prices that are halting mining operations, this heightened demand from around the globe will have to cause a supply squeeze eventually, although this realization still isn’t doing much for gold prices.
Gold has been doing great in plenty of currencies other than the one it’s valued in by most investors: The dollar. For gold to rise against the dollar, the value of the greenback would have to fall, but Williams doesn’t find this to be such an unlikely scenario; given the big balance of payments deficit and the adverse effects a higher dollar would have on the domestic economy, the Fed might not want it increasing in value any further. Consequently, the Fed might actually take steps to keep its currency under control.
Other than the Fed acting against the dollar, any one out of a number of possible ‘black swan’ events could go off at any moment and cause bullion demand to spike: Another national debt default or a geopolitical conflict taking a turn for the worse are just some examples of possible catalysts for gold’s ascension. Whichever the case, Williams believes that gold should do just fine in 2016.
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