Some Game-Changers for Gold Prices on a Long-Term Outlook
Gold prices over the past several weeks have taken a hit. They are down roughly seven percent from their highs made in early May. Should this be a sign of worry? No; more upside could be ahead.
In fact, there are 15 reasons why gold prices are undervalued and big gains could be ahead.
- Central banks around the world continue to buy the precious metal despite gold prices being well below the highs made in 2011. Know this: they are not buying it for speculative purposes. They are buying to hedge their reserves and they will need more.
- Those central banks that already have gold—they are hoarding it.
- Central banks around the world continue to engage in policies that have failed over and over again—low interest rates and money printing to name just two. Remember that gold is a great hedge against currency devaluation.
- Government debt around the world has reached an unprecedented level. It’s hard to believe that there aren’t more countries like Greece.
- As we approach the U.S. presidential election, the status quo is being questioned.
- The global economy continues to struggle. Major economic hubs are struggling to show any growth. China, Japan, Russia, Australia, the Eurozone, the U.S., Canada, Brazil, and many other nations are reporting growth rates that are just outright dismal. (Recall that gold is a hedge against all of this uncertainty.)
- The Chinese economy could collapse. Remember that China is the second-biggest economy in the world; if it’s economy falls, it could have dire effects on the global economy.
- The derivatives market has ballooned since the financial crisis, thanks to low interest rates. Roughly $700 trillion worth of derivatives are outstanding. With interest rates uncertainty ahead, one or two bad trades could decimate the whole financial sector.
- China is building a man-made island in the South China Sea. This has many concerned about what could be next. The U.S. isn’t too happy about this. Could U.S. and China go head-to-head?
- The Middle East continues to see problems. Terrorism in the region still remains a major concern. Could this turn into something big?
- The demand for gold bullion from India and China remains solid. In the first quarter of 2016, India consumed 116.5 tonnes of gold and China consumed 241.3 tonnes. (Source: “Gold Demand Trends Q1 2016,” World Gold Council, May 12, 2016.)
- Demand for the precious metal remains solid elsewhere in the world as well. In the first quarter, demand for gold in the U.S. increased by 21%.
- Exchange-traded products, which sold massive amounts of gold in 2013, are starting to buy once again. In the first quarter of 2016, they purchased 363.7 tonnes of gold bullion. Quarter-over-quarter, this figure increased well over 300%.
- Gold producers remain suppressed. Surely gold prices are up about 15% year-to-date, but they are still too low for many to produce profitably. Gold grades in the ground are low and costs to extract from the ground continue to increase.
- Gold discoveries have plummeted. According to Goldcorp Inc. (NYSE:GG), in the early 90s, well over 100 million ounces of gold were discovered. This figure has dropped to below 25 million in recent years. (Source: “Latest Presentation,” Goldcorp Inc., last accessed May 31, 2016.)
Long-Term Gold Price Outlook
Dear reader, don’t for a second believe these are the only factors making a strong case for higher gold prices ahead. There are many more that suggest the same.
I will be bold here and say this: looking at all that’s happening around the world, $5,000 gold prices seems like a real possibility. Here’s what you should also know: I don’t expect the gold price to hit $5,000 right away. It will take time, and I bet there’s going to be an uphill battle to the upside.
Nevertheless, gold price bears beware!
Courtesy: Moe Zulfiqar
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