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Where Gold Prices Are Headed in 2016
The stock market plunge of 2016 has been a great thing for gold prices.
Through the first 12 weeks of 2016, gold prices climbed nearly 18%. During the same time, the Dow Jones Industrial Average, S&P 500, and Nasdaq all dropped 8.3%, 8.8%, and 13.4% respectively.
Now, Money Morning experts predict the price of gold will continue to climb throughout 2016. And market volatility is not the only reason prices will keep climbing.
This makes now one of the best times for investing in gold.
But before we get into why the gold price will keep rallying, and the best ways to invest in gold, here's why gold prices have outpaced the markets so drastically in 2016…
The first reason for the gold price rally of 2016 has been the stock market turmoil in China.
The Shanghai Composite Index has fallen 47% since its peak in July 2015, as investors continue to worry about China's slowing economy.
And that slowdown in China, the world's second-largest economy, has spooked investors around the world. In January, China reported 2015's GDP was 6.9%. That was the lowest rate in a quarter century.
That panic in China sent ripples through global markets. It's a big reason the Dow fell 4.5% in the first two months of the year. As investors flee stocks, they typically head to safe haven assets like gold and silver.
Gold prices have also benefitted from the growing number of central banks that have implemented negative interest rates.
Japan launched negative interest rates for the first time in February, joining Austria, the European Central Bank, Denmark, Germany, the Netherlands, and Switzerland. Sweden's Riksbank – the world's oldest central bank – reduced its rate further in February too.
U.S. Federal Reserve Chairwoman Janet Yellen also scared investors earlier this year when she told Congress in her semiannual testimony that the Fed would study whether negative rates could be used in the United States.
Now another interest rate hike from the Federal Reserve in the near term is looking less likely. Forecasts for higher U.S. rates were a key factor pushing gold prices down 10% last year. Things are different this year, as gold prices have climbed.
"I've been saying for some time that the U.S. Federal Reserve would be unable to follow through on its promises to raise rates at an aggressive pace," Money Morning Resource Specialist Peter Krauth said. "Given how stocks have reacted in 2016, the markets are coming to this same conclusion."
While those two catalysts have sent gold prices higher in early 2016, here are four more reasons why the price of gold will climb even higher before the end of the year…
According to the Thomson Reuters' GFMS group, global gold output has risen every year since 2008, but that's likely to change in 2016.
William Tankard, head of research for precious metals mining, expects output to fall by about 100 metric tons, from 3,150 in 2015 to 3,050 this year.
Tankard commented, "This is in large part likely to be driven by the relative lack of development going into the industry over a three-plus-year period." He went on to explain that producers have been "high-grading" their production for several years thanks to weaker prices. But that option has now largely run its course, meaning lower-grade ores will produce less gold.
Gold Price Catalyst No. 2: The Cost of Money
The Fed finally decided to raise rates in mid-December, but that was by a small margin from 0.25% to 0.5%. And it's unlikely that the Fed will raise rates again anytime soon now that extreme volatility has overcome global markets.
As well, while inflation could start to finally take hold this year, deflationary forces are still going to work against that to keep any increase relatively weak.
That means that real interest rates will stay low, so the opportunity cost of owning gold will continue to support its ownership and attractiveness versus other asset classes like stocks, whose bull is getting long in the tooth.
The third main driver for higher gold prices in 2016 will be demand. While mining output proves likely to decline, low gold prices will continue to attract buyers, especially in Asia.
Last year India replaced China as the biggest overall buyer of gold, with a total import level likely to reach a whopping 1,000 metric tons, up from 900 metric tons the previous year.
Another factor driving demand is investors looking for safe-haven assets during a market selloff. I expect record sales set at various mints around the world to continue into 2016.
Low gold prices helped push U.S. Mint sales to a record level in 2015, with gold coin sales rising by an astounding 53% over 2014.
When the U.S. Federal Reserve hiked interest rates in December for the first time in nearly a decade, the central bank penciled in four rate increases for 2016.
Yet amid heightened global financial woes, many investors now believe near-zero interest rates will be the new Fed theme for 2016. Minutes from the Fed's January meeting, released earlier this month, show policymakers are growing increasingly concerned about global conditions, U.S. growth, and inflation. The consensus now is that there is almost no chance the Fed will raise rates in March. In fact, many doubt we will see another hike this year.
And those low rates are bullish for the price of gold in 2016.
Fed inaction is also likely to temper gains in the U.S. dollar. The Wall Street Journal Dollar Index, which gauges the U.S. dollar against a basket of 16 currencies, is down almost 1% in 2016 after two consecutive years of advances.
A weaker dollar is also good for gold prices. Gold is priced in U.S. dollars, so when the greenback declines, gold becomes more affordable for foreign buyers.
The Essential Guide to Buying Gold and Silver: Precious metal investing is widely regarded as the best "crisis insurance" for your portfolio. This guide gives you everything you need to know about the best stores of value in history, gold and silver. Read more…