The sharp drop in the price of gold during the last two months of 2016 destroyed traders' faith in the gold market.
As gold prices fell 10.9% to $1,151.70 from Nov. 1 to Dec. 30, traders and analysts surveyed by Bloomberg grew increasingly bearish. On Nov. 25, the percentage of bearish traders and analysts was roughly 19%. That climbed to 35% on Dec. 2 when the gold price hovered near a 10-month low of $1,177.80. While that bearishness retreated back to about 19% on the Dec. 23 survey, this was still a large percentage of gold traders who saw gold continuing to fall.
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But that bearish sentiment wouldn't last, and by Jan. 6, roughly 70% of those surveyed had turned bullish. Now, this increasing bullishness will push the price of gold up 15.2% from their current $1,215 level by the second half of 2017.
Here's why confidence is returning to the gold market...
[CHART] Traders Are Embracing Gold Again
As you can see, the last week of 2016 marked a tremendous shift in gold price sentiment. From Dec. 23 to Dec. 30, the percentage of bullish gold analysts and traders soared by about 50%. The following Bloomberg survey on Jan. 6 saw another 20% increase, putting the total percent of bullish surveyed participants at 70%. They said increased bullion buying in India and looming inflation from Trump's economic policies were reasons to be optimistic about gold prices in 2017.
This bullish shift among gold participants also marked a sharp rise in the price of gold. Between the Dec. 23 survey and Jan. 6 survey, the price of gold gained 3.5% from $1,133.60 to $1,173.40.
And Money Morning Resource Specialist Peter Krauth believes improving sentiment will continue to boost the gold price in 2017. He expects it to rise 15.2% by June 2017 at the earliest.
Here's the one factor that will fuel his price prediction - and negatively affect the entire economy...
Bullish Sentiment Will Push the Price of Gold to This Target by Q2 2017
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Krauth projects gains of 2.9% to 5.3% by the end of Q1 and 15.2% by the end of Q2. Since gold currently trades at $1,215, those gains translate into $1,250 to $1,280 in Q1 and $1,400 in Q2.
What will be the biggest driver of these gold price gains? Rising inflation.
You see, inflation measures how goods and services are becoming more expensive across the entire economy. This also applies to the stock market, which has traded at an all-time high since December. Since a soaring S&P 500 comes from soaring stock prices, inflation fundamentally rises from a stock market rally. But this explosive growth lowers the U.S. dollar's purchasing power, which hurts the economy.
High bond yields are also a sign of high inflation. Data from CNBC shows the yield on the U.S. 10-year Treasury has surged 31.3% to 2.35% since Nov. 1. Just last month, it was at its highest level since September 2015.
The Fed typically manages inflation by raising interest rates, but inflation is set to keep rising above the key 0.5% interest rate. The latest data from November shows the inflation rate already at 1.69% -- three times the interest rate.
Gold serves as a safe-haven investment, meaning it's used as a hedge against any downturn in the economy or stock market. Since inflation negatively affects both, the price of gold will rise as investors buy bullion to protect themselves from rising inflation.
"As we see inflation ramp higher, that mindset settles in and people start thinking overnight that we're in an upward inflation cycle," Krauth told Money Morning readers last month. "I expect we could see $1,400 gold in the latter part of next year."
The Bottom Line: The price of gold fell 10.9% in November and December as traders turned more bearish on the gold market. But since late December, gold price sentiment has staged an incredible turnaround as the bullish percentage of surveyed analysts sharply increased by 50%. As traders react to the surging inflation rate, we expect the price of gold to rise 15.2% to $1,400 by June 2017.
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Alex McGuire is an associate editor for Money Morning. Follow him on Twitter.
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