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Gold Prices: What to Expect in 2016
Gold prices rose 26% in the first half of 2016, reaching a two-year high. That beats the major market averages handily, as the Dow climbed just 3% during that time.
Gold mining stocks have skyrocketed even more dramatically. Every gold miner of the 28 with a market valuation of at least $300 million doubling their share prices, and 10 of them have tripled since the beginning of the year.
Money Morning Resource Specialist Peter Krauth expects the price of gold to keep climbing in 2016, on two fundamental catalysts.
Gold is traditionally a safe haven in times of market uncertainty. That's important to note now, because we are in uncertain times.
For example, gold rose sharply after Britain voted to leave the European Union (EU) in late June, as broader markets plunged. The broader markets have recovered, but the uncertainty Brexit triggered is far from over.
First, central banks are concerned that the exit will weigh on the British economy. As a result, Mark Carney, Bank of England Governor, has indicated that "some monetary policy easing" may well be in Britain's future.
And the U.S.? Well, let's put it this way. Pre-Brexit, Wall Street was anticipating an increase in interest rates. Now, there is almost no expectation of a rise in rates. Many analysts estimate that the Fed will leave rates at current levels at the Federal Open Market Committee (FOMC) meeting in September. Krauth observes that the CME FedWatch tool indicates that the odds of rates being raised at the September FOMC meeting are approximately 15%. Analysts estimate there is a 20% probability of the Fed voting for a decrease in interest rates for the remainder of 2016 and into the first months of 2017.
You see, Brexit wasn't just about Britain's leaving. It raised the possibility that other EU countries would want to leave the four-decades-old union as well.
So, global uncertainty and the flight to a hedge against that uncertainty (and any market volatility it causes) are key factors driving the price of gold today and it will for the remainder of the year.
In the U.S., the political election season adds to uncertainty.
So, while the two-year high in gold spot prices causes some investors to consider the gold rally part of the larger strength in commodities in 2016 to date (the Bloomberg Commodity Index is up nearly 14% on the year), gold should be thought of as insurance against market volatility more than a commodity.
Additionally, gold prices move inversely with interest rates. That's because precious metals denominated in dollars (like gold) become cheaper when interest rates fall.
And the second key catalyst for gold prices in 2016: demand.
Krauth points out that gold prices today are still significantly under the five-year average. Output of gold is forecast to be 3,050 metric tons in 2016, below 2015's output of 3,150 metric tons.
Yet demand is high and rising. The largest buyers are in Asia. In 2015, India became the world's largest demand source for the physical gold metal, with 1,000 metric tons of imports. That surpassed China as the largest global buyer for the first time. (In 2014, India imported 900 metric tons.)
Demand in the U.S. is also strong. At the U.S. Mint, 112,500 American Buffalo gold coins were sold in the first half of this year, 16.5% above the 96,500 sold in the year-prior period.
Now that we've discussed the factors that will drive gold prices higher, here's exactly how high we see them climbing…
Krauth forecasts that gold will continue to rise over the long term. He projects that gold prices will reach $5000 per ounce in 2020, a rise of roughly 260% from today's levels.
Krauth's forecast is based on several factors…
The first is economic uncertainty across the globe. The issues with the EU will continue past 2016, as issues within the EU may take years to work out. Some believe we may even see a slow collapse of the EU. That's only one factor driving a move toward gold as a safe haven.
The other is a huge rise in debt-to-GDP ratios.
The debt/GDP ratio in the Eurozone at the end of Q1 2015 was 92.9% – the steepest level ever reached. (The Eurozone consists of 19 countries within the EU that use the euro as their currency.) As high as that level is, it is likely to rise more over the next two years, as Britain negotiates leaving the EU. When the Eurozone has had to bail out member countries, the UK was always a large contributor. The Brexit will likely place more weight on the remaining countries – and increase the strain in the EU as a result.
As if that weren't enough pressure on the global economy, bond yields are also falling to very low rates worldwide. In early July, U.S. 10- and 30-year Treasury yields stood at all time lows of 1.38% and 2.12%, respectively.
In the Eurozone, they are also very low or negative. France's 10-year note stood at 0.13% in early July, and Germany's 10-year note was yielding -0.18%.
These low yields are not attractive to investors, and could cause them to move to gold as a long-term vehicle.
But do low yields mean higher rates in the long-term future? Well, no, says Krauth. Easeingmay be in the cards for later this year and into 2017 in both the U.S. and U.K. The European Central Bank (ECB) is also not likely to hike rates in the near future. Krauth expects low and negative interest rates globally to be one of the drivers of a $5,000 per ounce gold price.
Krauth also values gold according to a technical indicator. It's the Dow/gold ratio.
What's the Dow/gold ratio? The value is derived by dividing the Dow Jones Industrial Average by the price of gold. The end result lets you know how many ounces of gold would be needed to buy the Dow.
Currently, the ratio stands at 13.6. But that's a steep discount to the last peak of 42, which the Dow/gold ratio hit in 1999.
Over the next few years, Krauth forecasts that ratio will rise as the buying of gold picks up.
Given the expected climb in gold prices, the next question is: what should investors buy?
Investors interested in gold have three ways to play it: gold stocks, exchange-traded funds (ETFs), and physical gold.
Many of the gold mining stocks have posted stellar returns in 2016 to date, and that should continue.
A Money Morning #1 pick among gold miners is Goldcorp Inc. (NYSE: GG). The primary reasons (along with the gold price per ounce forecast) is its technological leadership and new mining techniques.
GG stock was hurt in late 2015 by high costs of operations. However, it expects to pare $500 million in corporate expenses and costs related to mine sites during the coming two years. It is also increasing production output at two sites that started commercial production in 2015.
Goldcorp forecasts 2.8 million to 3.1 million ounces in production this year at an "all-in sustaining cost" (AISC) per ounce of $850 to $935.
GG has risen 50% year to date. The price target is $26.50, which is another robust 48% climb.
Money Morning also recommends three other great gold miner candidates to invest in for the gold bull.
At a current price near $40, shares of Colorado-based Newmont Mining Corp. (NYSE: NEM) are one of the gold-miner doubles, up 138% on the year. NEM is engaged in the development, exploration, and production of gold in the U.S., Peru, Australia, Indonesia, Suriname, and Ghana, as well as silver and copper.
Newmont is concentrating its efforts on its highest-quality mines after selling off some assets. In Indonesia, a consortium is said to be considering a $2 billion offer for NEM's Indonesian assets.
The shares of AngloGold Ashanti Ltd. (NYSE ADR: AU) have risen 197% so far in 2016. RBC Capital Markets rates AU "Outperform," believing it is the strongest buy in its South Africa gold stocks, backed by a portfolio that is both diverse and operating at reasonable cost. AU is a mining and exploration concern with 17 mines across the Americas, Australia, and Africa. It boasts impressive historical EPS growth and steady climbs in net income.
Toronto-based Barrick Gold Corp. USA (NYSE: ABX) has gained 182% since the beginning of 2016. It produces, explores, and mines for gold worldwide, and is the world's largest gold producer. It also has copper concerns. Several hedge funds have large holdings in ABX.
Another great way to play gold is to buy an ETF. With ETFs, investors can benefit from the gold bull run without the safety concerns or expense inherent in buying (and thus having to store and guard) physical gold. The advantage over the physical yellow metal is that ETFs are very liquid and can be purchased and sold with the same ease as stocks.
ETFs strive to track gold prices, which means they benefit in correlation to gold. SPDR Gold Trust (NYSE Arca: GLD) is backed with actual gold, in fact, it is the largest ETF with physical gold backing. The expected gold bull will result in benefits for GLD shares.
NYSE Gold Bugs Index (INDEXNYSEGIS: HUI), which is an index of companies involved in gold mining, is how gold stocks as a whole are commonly tracked. Investors use the HUI:gold ratio to compare gold stocks to the price of gold. The value of the index is divided by the price of gold.
Want an ETF with a basket of the world's biggest gold miners? Try Market Vectors Gold Miners ETF (NYSE Arca: GDX). GDX diversifies an investor's gold mining holdings across 100 miners.
One of the few ETFs that give investors the option to 1) hold the ETF or 2) to choose to have gold bullion, such as coins and bars is the Merk Gold Trust (NYSE: OUNZ). There are several options an investor can choose if they want actual possession of the physical metal: American Gold Eagles and American Gold Buffalos are popular options.
The investment goal of ProShares Ultra Gold (NYSE Arca: UGL) is to increase twofold the spot gold price. This could have an exponential effect on the swings of the ETF, as they hold futures contracts rather than physical gold. Their gains are attained through the derivatives market. UGL shares could go up much further than the price of gold per ounce, but they could also fall farther in any pullbacks.
Investors who have a low to medium risk tolerance may want to stay out of the derivatives market and stick with the ETFs that seek to track the price of gold.
While the ETFs are a good choice for those who want their investments to follow the price of gold, another way – the oldest way – to own gold is to buy physical gold. Essentially, there are two methods: bars and coins. But the physical yellow metal does require some expenses. Investors need a secure safe or to place the gold in a bank vault.
For investors interested in gold coins, the U.S. Mint's American Eagles are easy to buy and very cost-effective. They come in denominations of 1/10th-oz., 1/4-oz., 1/2-oz., or 1-oz. coins. For investors who want to own gold coins that are also legal tender, the American Buffalos are 1-oz., 24-karat $50 coins.
Gold bars can be purchased in a number of weights from one ounce to more than 100 ounces.
Money Morning Chief Investment Strategist Keith Fitz-Gerald suggests holding $1 worth of precious metals such as gold for every $10 an investor holds in bonds. If you are holding $10,000 in bonds, you would have $1,000 in gold or other precious metal.
He also recommends rebalancing the bond/gold relationship at least once a year. Rebalancing simply means resetting the original 1:10 ratio. If the price of gold has gone up, you sell it and either reinvest or take profits. At the end of your rebalancing, the ratio should be the 1:10 it was at initially.
Keep up-to-date with gold and gold prices at Money Morning. Follow Money Morning on Facebook and Twitter.
Gold prices are volatile because of weakening currency and the Fed's comments on whether or not it will raise interest rates. When the U.S. dollar is strong, foreign investors are able to buy less gold. That sends the price down because fewer people can afford it. When the dollar is weak, gold prices tend to rise. Gold prices can also rise and fall based on speculation on the Federal Reserve. Gold doesn't earn money like an interest-bearing account, so gold is a less attractive investment when investors can earn interest on money they put in the bank. If the Fed keeps interest rates the same, it shows there are underlying issues with the economy, which makes gold a strong asset protector and can increase its price.
Even though gold prices are over $1,300 an ounce, Money Morning projects gold will climb to $5,000 per ounce by 2020. The most direct way to buy gold is by purchasing physical bullion, such as gold coins and gold bars. Money Morning Global Credit Strategist Michael Lewitt suggests purchasing American Gold Eagle coins from a reputable dealer if you want to own physical gold. If investors don't want to deal with paying to store physical gold, there are other ways to invest in gold without physically owing it. There are several gold mining stocks and gold ETFs on the market.
Peter Krauth, Money Morning's Global Resource Specialist, said that gold prices will reach $1,400 by the end of this year. That's a 6% gain from the opening price of $1,318.30 on Sept. 16. Krauth has identified several key reasons why gold prices are going to continue to climb in 2016.
Here's our gold price prediction, as well as how interest rate hikes play a role in gold prices.