Gold Remains Bullish as Investors Look to Protect Wealth

After years of decline, many analysts were predicting gold prices would fall to a low of $800 an ounce in 2016. That’s a far cry from the August 2011 record high of $1,910 per ounce.¹ Once the go-to investment for those hedging economic uncertainty, gold fell out of favour as the stock market hit record levels and the Federal Reserve hinted it would start raising its key lending rate. Instead, gold prices rebounded at the start of 2016 on the heels of a tanking stock market and fears that the Federal Reserve would hold off on future rate hikes. This has provided precious metals, like gold and silver, with a serious boost. And the long-term outlook for gold remains bullish.

Gold Prices Rebound in 2016

After 11 years of growth, gold topped $1,910 an ounce for the first time ever in August 2011 as investors sought to protect their wealth against financial turmoil and speculation the global economy was slowing. At the time, many speculated gold would breach $2,000 per ounce by the end of the year. That didn’t happen. Over the next few years, gold prices plummeted on the heels of a strengthening U.S. dollar, surging stock market, a then-strengthening economy, and easing geopolitical tensions. By December 31, 2015, gold prices had fallen 45% from its 2011 high, closing the year out at $1,060 per ounce. With many analysts predicting gold prices would fall even further, reaching a low of $800 an ounce. That didn’t happen either. Gold prices rebounded in 2016 on fears of a weakening U.S. and global economy, global stocks in bear market territory, and rising geopolitical tensions. Since the beginning of 2016, gold prices have surged more than 15% and are currently trading near $1,226 an ounce.

Fundamentals for Gold Remain Bullish

Because it is seen as an economic hedge, gold usually has a negative relationship with the stock market. If the stock market is doing well, it means the underlying economy and U.S. dollar is strong, and there is no need to look for a safe haven investment like gold. This explains, in part, why gold prices were down over the last number of years. It also explains why gold prices are up in 2016. The global markets are in bear market territory with the MSCI All Country World Index down more than 20% from a high set last May.² Specifically, Canada, China, Germany, England, France, Span, Sweden, and Japan are all in bear market territory. The U.S. isn’t, but it soon could be. That’s because almost half of all S&P 500 companies get sales from outside the U.S. Weak fourth-quarter earnings results and global economic downgrades from the OECD, World Bank and IMF suggest more and more investors will be looking at precious metals like gold and silver to diversify their holdings. Even the Federal Reserve is changing its tune. After raising its key lending rate in December for the first time in almost a decade, economist Janet Yellen hinted recently that future rate hikes could be put on hold as global stocks tumble.³ On top of that, Yellen believes the U.S. economy could be further hurt by growing weakness in Canada, China, Japan, and the eurozone. The outlook for the U.S. and global economy is not good, at least for a few years. The S&P 500 is down roughly 5% year to date and remains extremely volatile. With weak fourth-quarter earnings pouring in, investors should expect stocks to go lower from here. This will have the added benefit of adding strength to the price of gold.

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1. Stockcharts.com, last accessed February 23, 2016; https://stockcharts.com/h-sc/ui?s=%24GOLD&p=M&b=5&g=0&id=p70441969782
2. Moreano, G “MSCI global stock market index hits bear market,” cnbc.com, January 20, 2016; https://www.cnbc.com/2016/01/20/msci-global-stock-market-index-hits-bear-market.html.
3. Yellen, Janet L. “Semiannual Monetary Policy Report to the Congress,” Board of Governors of the Federal Reserve Systems web site; February 10, 2016; https://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm.