Why Gold Prices Will Rally in 2017
Gold prices ended 2016 on a down note, finishing Q4 2016 down 12.1% to $1,151.70.
3 Catalysts That Will Boost Gold Prices in 2017
The decline came on the heels of the presidential election and a December rate hike, which pushed the U.S. dollar to an all-time high of 103.25 basis points on Dec. 20. That lowered the price of gold as a stronger dollar made gold more expensive to people buying it with other currencies.
But gold prices have seen a sharp rebound so far in 2017. They're up 9% from $1,151.70 on Dec. 30, 2016, to $1,256. The metal booked an 8.1% gain in Q1 alone.
Money Morning Resource Specialist Peter Krauth sees gold prices continuing their rebound throughout 2017. That's why Krauth – a 20-year veteran of the metals and mining sectors – just outlined his specific gold price targets for 2017.
But that's not all. We've also included our long-term forecast for gold prices through 2019.
Before we get to our price targets, here's a breakdown of the three factors that will support the gold price rally in 2017…
2017 Catalyst for Gold Prices No. 1: Rising Inflation
According to Krauth, inflation will be a huge boon for gold prices in 2017. The inflation rate currently sits near a five-year high, and it's poised to move even higher thanks to the record-high stock market.
The inflation rate measures how much prices across the U.S. economy are generally rising. Since a rising stock market comes from rising stock prices, inflation – by definition – is a natural result of a stock market rally. But too much of this growth reduces the dollar's purchasing power, which damages the economy.
That's why the U.S. Federal Reserve manages inflation through interest rates. In December 2016, the Fed hiked its key interest rate by 0.25% to counter strong economic growth and record market highs. The committee raised rates again on March 15.
Despite interest rates being at their highest in more than 10 years, the stock market has continued to soar. Since the December rate hike, the Dow Jones Industrial Average is up 4.5%, even breaking through the 21,000 level for the first time ever on March 1.
But there's a growing sense of unease among investors. Rising inflation often convinces people the economy is growing unstable, which can urge investors to sell their positions before the market takes a dive.
Since safe-haven assets like gold spike in demand when there's economic uncertainty, gold prices will rise as people protect themselves.
2017 Catalyst for Gold Prices No. 2: Fewer Short Bets
Another sign that the price of gold will rise this year is reduced short selling in the gold market.
A short position is when someone bets that a price will decline rather than increase. For example, if the gold price experiences a 5% loss, a short seller on that will make a 5% profit. A high volume of short bets on a stock or commodity indicates bearish sentiment in that particular market.
The number of short positions in gold stocks started falling late last year and has continued to decline since then. One of these stocks is NovaGold Resources Inc. (NYSEMKT: NG), a gold mining company based in Canada. Between November 2016 and December 2016, the volume of short bets on NG stock declined 3.8% to 12.5 million. That shows a shift in sentiment from bearish to bullish in the gold market.
But the real indication of falling short interest is the rising Gold Bugs Short Index (HUISH). This tracks short selling on mining firms that specifically refuse to cut gold production based on gold price movements. HUISH has dropped 13.3% in 2017. That decline shows how short interest in gold companies is falling alongside short interest in gold prices.
2017 Catalyst for Gold Prices No. 3: The Strengthening Dollar
Investors typically believe gold prices and the dollar have an inverse relationship. When the dollar rises, gold prices fall – and vice versa. This was certainly true in the last quarter of 2016, when the Fed's interest rate hike shot the dollar to an all-time high of 103.25 basis points in December.
But Krauth believes the gold price is capable of roaring through this high interest rate environment. That's because it's done it before in the past when rates were more than 15 times higher than their current 0.75% level…
During the 1970s, interest rates were consistently above 5%. When Arthur Burns was the Federal Reserve chair in 1974, he hiked rates to an unprecedented 13%. Five years later, new Fed Chair Paul Volcker pushed them to another all-time high of 15.5%.
While we commonly think this would've destroyed the gold market, gold prices actually skyrocketed through this era. The metal soared from roughly $34.83 per ounce in January 1970 to over $500 by January 1980 (unadjusted for inflation).
This chart shows how gold prices and interest rates moved mostly in lockstep with each other during the 1970s…
"Through all of this, gold enjoyed a kind of 'Golden Age,'" Krauth told Money Morning readers. "That was a bull market of epic proportions – the mother of and benchmark for all secular metals bulls."
This trend appears to be happening again right now. Since the first rate hike in nearly a decade on Dec. 16, 2015, the price of gold has gained 16.6%. With two more rate hikes since then, it's clear that high interest rates can send gold on a long-term bull run.
Now that we've run through the three catalysts for gold prices, here's exactly where we see them heading in the short term and long term…
Our 2017 and 2019 Forecasts for Gold Prices
Krauth's newest gold price forecast shows the metal soaring to a multiyear high of $1,400 an ounce by the end of 2017.
"Gold is actively looking bullish right now," Krauth said. "It's not unreasonable to expect $1,400 farther into 2017."
And if history is any indication, gold could rocket all the way to $5,246 by 2019. That would be a tremendous 318% rise from the current price.
Although it fell 12.8% in the last quarter of 2016, the gold price is still in a bull market. After hitting a five-year low of $1,056 in November 2015, gold staged a 23% turnaround the following year. Even if gold prices see a dip in 2017, it won't be dramatic enough to end their current bull market.
Since 1970, every bull market for gold prices has offered stunning returns. The median return and duration of each bull market over the last 47 years has been 451.4% and 41 months, respectively. Since gold bottomed in November 2015, we're roughly 17 months into the current bull market as of early January. That means the price of gold has room to gain 451.4% to $5,246 by the time we get to the first quarter of 2019.
FAQ No. 1: What Influences Gold Prices?
Although they often go hand-in-hand, the two most common factors that move gold prices are movements in the U.S. dollar and Fed speculation or decisions on rate hikes.
Since gold is priced in dollars, the gold price often sees a short-term drop when the dollar climbs in value. Interest rate hikes or generally hawkish behavior from the Fed can boost the dollar, which also pulls gold prices lower in the short term.
But as we mentioned above, higher interest rates and a higher dollar have been known to actually push the gold price higher over the long term. While the Fed has raised rates three times since Dec. 16, 2015, gold has climbed 16.6%. That rally will likely continue as the Fed plans to raise rates two to three more times by the end of 2017.
FAQ No. 2: Is Now a Good Time to Buy Gold Even with High Gold Prices?
Yes, now is the perfect time to invest in gold. Even though the price of gold is already up double digits this year, Money Morning expects it to reach as high as $5,246 by 2019. That means you could get in on gains of more than 300%.
While many assume buying physical gold is the easiest way to profit from the gold market, storing and maintaining bullion can be a hassle. The metal has to be in certain conditions to retain its value, and making an effort to maintain it can be more difficult than you might realize.
If you don't want the hassle of storing and maintaining gold, we recommend investing in gold mining stocks. Money Morning Executive Editor Bill Patalon's favorite gold stock is Goldcorp Inc. (NYSE: GG), which could rise as much as 89% in the next year. We also like Barrick Gold Corp. (NYSE: ABX). Shares of ABX stock could see a return as high as 30% over the same period.
FAQ No. 3: Are Gold Prices Going Up in 2017?
Krauth says that gold prices will reach $1,400 by the end of 2017. And if history is any indication, gold prices can soar to $5,246 through 2019.
Here are our in-depth gold price predictions for the short term and long term…