by Judy Baker, Argo Gold
At a tumultuous time in the world I am going to put considerations forward with respect to where gold bullion is going in 2017.
The theme of Negative Real Rates being echoed from economists seemed to be the catalyst that shook investor confidence in paper currencies of the biggest economies of the world and resulted in material investment in gold bullion and gold stocks. The rate of inflation was higher than the interest rate on an investment. The rapid price increase of gold bullion and gold equities was fuelled by short covering.
The spectacular rise in gold bullion and gold stocks resulted in many investors across the board feeling like they had missed the initial move in the gold bull market. In my opinion, though investment diversification into gold was now on everyone’s radar screen and investors were looking for pullbacks or a correction to get a position and will continue to do so.
In 2016 the world is in a tumultuous time with the unexpected outcomes of Great Britain voting in favour of Brexit and a Trump presidency in the United States. The US economy and equity markets have been a bright spot on the world economic map which has been in a state of malaise. The forthcoming Trump presidency is signalling a full on economic agenda for the United States and has brought optimism for a further boom in the US economy.
The US equity markets are on wheels. The US bond market is getting crushed. Most economists believed a US rate increase was already baked into the cake prior to the election but it is a very highly likely scenario now. Thus, interest rates are going up and the unknown is at what rate relative to inflation. Will negative real rates remain in place?
It seems the world spent its way through the economic malaise – with low cost debt and increased money supply – to come out the other side. Certainly inflation would be an indicator to central bankers that the world economies are expanding but as a lagging indicator it can be difficult to move rates to control inflation. Monetary policy has been used to inflate the world out of economic malaise so I expect extreme caution with respect to raising rates so as not to harm the “golden goose”.
The other consideration for a cautious increase in rates is the carrying cost of debt. The “new norm” low interest rate environment has created a “new norm” of significant debt levels as well. Thus, the real rate environment is likely to remain in the slightly negative to neutral environment to slightly positive range for some time without stepping too far positive with the fear of harming the “golden goose” or causing a “carrying cost of debt” crisis.
So where is gold going in 2017?
The negative real rate theme being echoed by economists shook investor confidence in paper currencies that caused the initial rotation into gold did not go unnoticed by investors and in my opinion, investors want to have an investment portfolio now that includes gold and gold equities will continue to diversify into the gold sector.
The governments of the largest economies in the world adopted significant government open market operations which have impacted the value of currencies. A unit of paper currency can’t be worth as much after ongoing open market operations by governments as before. Hence, the renewed investment interest in gold and silver.
I believe wealth creation in the US will drive further investment by the wealthiest economy of the world into gold and silver. In countries where people don’t trust their governments and currencies there will also be an ongoing affinity to buy gold.
I also see ongoing tumultuous times ahead for “country cooperation” with Brexit - and more significantly -Trump driving a US centric world. There is a material amount of uncertainty that is being created for countries outside of the United States. What will the rest of the world do and how will China react?
In summary, I am positive on gold in a world where the central bank interest rate lever has to be tempered by a world that has taken on significant debt. Paper currencies of the world’s largest economies cannot be worth what they were before the governments fired up the printing presses for years. And investors see the need for a diversified portfolio that includes gold in an uncertain world.
Judy Baker, Argo Gold
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