Despite recent drop, gold set to soar

Contrary to our expectations and nearly everyone else’s who pays attention to the price of gold, the yellow metal has, since Election Day, shed nearly 15 percent of its value in U.S. dollars.

According to the pundits who pay attention to such matters, the election of Donald Trump should have pulled the rug out from under stock prices, hammered the dollar against other major currencies, and propelled gold sharply higher.
But once again the pundits have been proven wrong: Stock prices on Wall Street have zoomed to new historic highs and gold has, once again, disappointed.

Despite this failure to perform, our long-term positive outlook for gold remains unchanged.
In retrospect it is easy to see what happened: Investors and speculators expected a shift in fiscal policy – regardless of the election results – with increased government spending, rising Federal debt, and higher interest rates.
The expected rise in Federal spending gave Wall Street a boost up despite expectations of higher interest rates, expectations that might have otherwise been a drag on equities.

At the same time, a spate of favorable business indicators raised the probability the Federal Reserve would soon shift to a less accommodative monetary policy. Higher interest rates boosted the U.S. dollar’s value in world currency markets . . . and, in turn, a stronger dollar depressed the dollar price of gold.

Like a self-fulfilling prophecy, hedge funds and other institutional speculators were quick to buy equities and sell gold once it looked like a quick buck could be made on the trade – with more players jumping in once it looked like these trends were continuing.

One thing is for sure: In the short run, financial markets – including gold – dance to their own tune and short-term forecasts, even when based on serious analysis, are often wrong. Hence, to minimize risk and assure lasting returns, we advocate diversification and the inclusion of physical gold in every investor’s portfolio.
Over the long term, however, fundamentals do matter . . . and we feel increasingly comfortable with our long-term bullish forecast with gold prices rising to new heights.

Indeed, despite the metal’s recent disappointing performance, the price of gold is likely to zoom much higher in the years ahead, perhaps doubling or even tripling from recent levels by the end of the president-elect’s four-year term.
Contrary to the experience of the past few years, gold’s long-run prospects are less dependent on U.S. monetary and fiscal policies or on interest rates and the dollar . . . and more dependent on demographic trends in China and India, trends that virtually guarantee growth in demand from the expanding middle and wealthy classes in these two gold-friendly countries.
In addition, less certain – but potentially very significant for boosting the metal’s future price – is the very recent relaxation of Islamic Sharia law and the associated regulatory changes that will make possible investment in physical gold and other related assets by millions of religious Muslims around the world.

Jeffrey Nichols
12/16/2016