Just like last year, the Fed has promised several more interest rate increases in the coming year, and that prospect has pushed gold prices down. But what if 2017 is a repeat of 2016, with the Fed backing away from its promises once again. Gold could stage another first-half rally, as it did in 2016. And even if the Fed raises rates, we know that gold gained over 50% the last time the Fed raised rates (2004 to 2006), and if the Fed keeps raising rates, that will increase the cost of interest service on America’s nearly $20 trillion in public debt. (Our debt was less than half that level a decade ago). The new Trump spending policies – like a proposed trillion-dollar infrastructure bill – might push the budget deficit past $1 trillion per year again, as happened in each of the first four years of President Obama’s first term in office.
In addition, world tensions are growing. World leaders – often led by Russia – tend to test the new American President early in his term. Recall John F. Kennedy’s debut, when the Bay of Pigs made him look weak, so Khrushchev tested the young President by shipping missiles to Cuba. Recall the new and naïve President Jimmy Carter, who let Russia’s Brezhnev expand the Soviet empire into every continent on earth, including Angola and Mozambique, Afghanistan, and Nicaragua near our shores. Or recall how the Soviets shot down a commercial 747 airline over Russian air space early in the Reagan presidency. Then, five months into George Bush, Sr.’s term, China cracked down on protestors in Tiananmen Square. The toughest test of all came early in George W. Bush’s term with the attack on America on 9/11/2001.
We’ll see if Donald Trump is ready for “prime time” when Vladimir Putin of Russia (or China’s Xi Jinping) tests the new President early in his term. There is also a tinhorn dictator in North Korea who can purportedly reach our west coast with nuclear-tipped missiles. All this comes on top of heartbreaking film footage of refugees in Syria and threats throughout the Middle East from ISIS and other extremists.
Gold is a proven “crisis hedge” when foreign conflicts erupt, so we could see a sharp rise in gold when the new President faces his first big external threat. Beyond that, gold remains an “inflation hedge,” and we’re seeing consumer and producer prices rising at a 2% rate again. Some of Donald Trump’s expansive spending policies could push the rate of inflation even higher, so don’t count on gold retreating in 2017.
In the meantime, new gold supplies from mining operations likely peaked in 2015 (we won’t know the full facts until March), creating a potential supply squeeze on gold if demand picks up in 2017. With a slightly shrinking new supply and the triple threat of inflation, deficits and escalating foreign crises, the price of gold could approach $1,400 by mid-2017. Diversify your portfolio with gold now!
Gold declined another $25 last week. Silver also declined, by $0.75 last week, but silver is still performing better than the major stock market indexes for the year-to-date. The proximate cause of gold’s latest decline was the Federal Reserve interest-rate increase last Wednesday. That increase was generally expected, but what seemingly sent gold down was the announcement from Fed Chair Janet Yellen that the Fed was likely to raise rates another three times in the next year. However, they said something similar last December, too. Then, they proceeded to delay the next rate increase for an entire year, until last week.
Review of the Gold Market in 2016
The gold market in 2016 was a tale of two halves. The first half was strongly bullish for gold. Gold began the year at $1,060 after the Federal Reserve had raised interest rates for the first time in nine years on the previous December 16 (2015). In the first six weeks of 2016, gold shot up from $1,060 to $1,240. On February 11, the day of maximum pessimism, oil had fallen to $26 per barrel, the U.S. stock market had fallen 11% for the year-to-date and gold had risen 17%. As a result, the Fed had to reverse course on its promise of a scheduled rate hike. As it turned out, the Fed raised rates only once – on December 14.
Gold was flat for most of March, April, May and June, but then it shot up after the surprise “Brexit” vote on June 23. Specifically, gold rose from $1,262 on the day of the Brexit vote to $1,366 on July 6, its peak price for the year. At the same time, 10-year Treasury bond rates fell to their all-time low of 1.357% on July 5. At the same time, government interest rates were below zero in Japan and most of Europe, giving gold a “level playing field” when it came to interest income – neither gold nor bonds offered much cash!
Gold stayed above $1,300 through early October, when the election results took center stage. The key for gold demand through the first nine months of 2016 was gold ETF buying, since demand in China and India had been muted by government policies. Going into the election, gold was still above $1,300 on November 4, the Friday before the election. Most pundits thought Hillary Clinton would win, but when Donald Trump won, the gold price soon retreated and stocks soared. Gold ETF traders quickly abandoned the yellow metal. Commerzbank reported this week that Friday (December 16) saw gold holdings “cut for the 26th day of trading in a row.” This puts ETF gold holdings at their lowest since before the Brexit vote.
Gold began the year trading well above stocks, but by the end of the year, stocks may beat gold once again, with silver being the surprise winner for the year – beating stocks and doubling gold’s gains. Consider buying some always popular Silver American Eagles and Silver Rounds!