"If you don't own gold, you know neither history nor economics"
- Ray Dalio
The pieces are in place for gold to take off this year. Gold has peaked at 3155 tonnes, and production is set to fall 3% this year. This decrease in supply will bode well for higher gold prices. There are some factors that are holding back this metal from making substantial gains. Among them is a strong dollar, overall weakness in commodities and corporate earnings putting some faith in this volatile market. Contrary to belief, gold does not always decrease with rising interest rates, most notably when the increases are set to rise at these low levels. The demand for gold has recently hit levels near that of the financial crisis, and with production slowing, this is a great buying opportunity. Gold is undervalued, and is poised to make a comeback after recently hitting a 6 year low.
The U.S. Slowdown
The U.S. economy is still struggling and this is shown in our recent jobs report. December, a month of mass consumption and production, failed to impress. Only 16,000 jobs were created for those between ages 24 and 55, which now has many worried we are headed into another recession. The Fed was reluctant to raise rates back in December due to poor economic reports. And, as we all listened to Yellen give her forecast, the reality of this slowdown became evident. The same day interest rates rose, gold began to rise and in the days and weeks to follow, it has been resisting a downward spiral that many analysts had thought would occur. The next GDP report for Q4 of 2015 is due soon, and this will reflect how weak our economy is. It is saddening to think the U.S. most likely only grew at a pace of about 1% for Q4 of 2015. There are a slew of analysts that also believe the Fed will refrain from increasing interest rates. The overall consensus is that we will see two more interest rate hikes, while others believe there will be none once it is revealed how poor our economy is performing. Among these voices is El-Erian, who is confident the Fed will raise interest rates only twice, and Peter Schiff, who believes the situation is much worse and the Fed will stop the hikes and may even lower rates.
China, China, China
China's economy is slowing, and has been buying gold in record amounts. China's economy will continue to slow and could face a large economic downturn, which would have many leave continue to sell and buy the safe haven metal. The recent GDP report for China has missed their target of 7%, instead they have achieved 6.9% growth. China is now growing at the slowest pace in 25 years. Most are delusional that this is bad for the global market, and are less skeptical of China's numbers than they should be. Marc Faber, aka Dr. Doom, may have a negative outlook that frightens most bulls, but the data supports this negative outlook. Marc has recently stated that he believes the actual GDP of China is closer to 4%, possibly less. To be truthful, China is known to skew their numbers yet the bulls look past China's artificial and unethical practices to bolster their outlook. China is a giant debt bubble that pays off its interest with even more debt. When China's bubble bursts, we will see a huge demand for gold, reminiscent of 2008-2011.
Geopolitical Threats Are Everywhere
Geopolitical factors around the world are taken less seriously than they should be. Tensions between Saudi Arabia and Iran are the worst they've been since 1985, affecting oil prices. Russia and the U.S. are involved in a proxy war in Syria, and ISIS continues to spread terrorism throughout the world. Turkey and Russia are not on good terms to say the least. North Korea has supposedly tested an hydrogen bomb and China-Taiwan relations are beginning to weaken, due to the recent win by Tsai. China is also building military defense islands on the South China Sea, which is making those in Japan nervous. Britain is strongly considering leaving the EU, and other countries in Europe are set to face a economic crisis similar to Greece. I am an optimist, yet with all these geopolitical relations in turmoil, it is only a matter of time until real trouble begins.
This will be an interesting year to say the least, but one thing is certain, a little gold in your portfolio wouldn't hurt.
Disclosure: I am/we are long NUGT, GG, GOLD, NEM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long Options in Gold ETFs