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Gold Forecast 2016: What have we learnt from 2015 and what is in-store for 2016?
The gold price in 2015 had a noticeable amount of fluctuations. It has been a long year for gold and investor patterns mixed with the never-ending wait for an interest rates rise, has played heavy on the price. Last year I think I wrote a succinct gold forecast for 2015, drawing on what had happened in the previous year. For this gold forecast I am going to follow the same stratagem.
What we learnt from the gold price in 2015
Gold opened on 2nd January 2015 at £766.406, $1184.25 and €983.351 respectively and closed on the 24th December 2015 at £719.424, $1071.90 and €978.015. Across the board from the first fix in 2015 to the last gold fix of the year, the gold price has fallen £46.98 (-6.1%), $112.34 (-9.45%) and €5.33 (-0.54%). To fully analyse these numbers to understand the volatility of the gold price in 2015, you need to look at the range of each currency, the average price and the standard deviation.
The gold price range in 2015 was £169.29, $248.60 and €182.83, with an average price over the course of the year of £759.16, $1160.88 and €1,045.80 respectively. The standard deviation of each was £40, $56 and €44 which is what you would expect from this year’s trading. The dispersion of data and the range of figures is not particularly surprising and if you were going to draw a line on a graph you would in essence be drawing a snaking line that is on the way down but has had a number of resistance points. Gold in 2015 had a lot of downward pressure mainly from the incoming interest rates rise. The market therefore was held at ransom a number of times as investors waited to find out if the FOMC were at last going to raise interest rates. With this in mind, there were corrections that happened throughout the year that punished the gold price at times and when no interest rates rise occurred the price bounced the other way. The gold price also did not fall quite as much once it appeared the interest rates rise was almost certainly going to happen. It is likely that the gold price had already factored in the rates rise earlier in the year. The gold price benefited in 2015 from bad financial data coming from the EU but most importantly from China.
Gold Forecast for 2016: What’s in-store?
In truth it is going to be much like 2015, except we know that the FED are now on the path to further incremental interest rates rises and the Bank of England (BoE) are likely to follow suit. The gold price is going to have more pressure put on it. This will mainly come from the strength of the dollar. The FED will want to capitalise on the dollar’s gain from last year and compound on that in 2016 to fully make it the alpha currency. The real test will be from emerging economies that are pegged to the dollar and also from the US’ main trade partners who will find the strengthening dollar a hindrance. It would hardly be surprising if we see a slow down in the global economy as trading partners decide to trade a little less. After all, it is all very well sailing ahead of everyone but the likelihood is, they will have to come back and help everyone else navigate to safety also.
In 2016 it is certain that the BoE will follow the US and raise interest rates. It wouldn’t be much of a surprise if that happens in the earlier part of the year. The UK have arguably been the strongest economy in 2015, even comparatively to the US and if they want to keep pace, a rates rise will be on the agenda for the UK. In Europe I think the timeline for a rates rise and weaning off of cheap money is a little more of a dream. The Eurozone will want to do better than last year but as always I think something like Greece could well destabilise the market. The Euro is far more susceptible to setbacks and I think we will see examples of that in 2016. China are the other economy to focus our attention on and rightly so. They are a major global player in almost every aspect of trade and economics. The Chinese published a number of poor figures in 2015 and again it is likely they may well continue to slowdown in 2016. It probably won’t be for long however as the price of commodities has fallen and the return of consumerism and growth in the west will undoubtedly help to boost Chinese manufacturing and exports. As with the UK and the Eurozone, the Chinese will be eyeing the dollar and will have to make sure they can maintain currency parity. If they don’t, expect more bad data to come.
Lastly, if we specifically focus on gold and other commodities I think 2016 is going to be an interesting year and I’m feeling a little more confident than I was in December 2014. For one thing, the oil price has depreciated a lot in 2015 and presuming that doesn’t fall further this will help to keep commodities, such as gold on an even keel. With the price of gold lower than it has been for six years, the gold mines will be keen that the price does not fall too much more. Often in the precious metal industry, the $1,000 benchmark is often cited as the lowest the gold price can be for large companies to operate profitably. If the price of gold does fall further, the mines will likely strangle supply (not that physical demand has much bearing on our paper traded cousins) to slowdown the supply of the precious metal to fall in line with demand. Towards the back end of 2015 we were beginning to see the effects of this slight moth-balling.
Another aspect of the lower price of gold I’m interested in, is the buoyancy the gold industry will experience as consumers begin to move back to buying gold for jewellery but also for the savvy investors looking to now buy into gold at the lower price. For those wily enough to have watched the peaks and troughs, 2016 may well be the year that those few gold bargain hunters begin to dip their toes back into the market, as they did in the early to mid-2000s. I, like a lot of people, am not overly convinced about the markets and bubble that has begun in property and equity markets again. My concern is that the markets have got a bit carried away too soon as enthusiasm for post-recession growth has pushed the FTSE 100 and the Dow Jones to record highs. As the interest rates do increase in time, those companies more vulnerable in the stock market, will not only struggle as interest rates increase but will also feel the force of investor confidence returning to reliable returns in the bond market. A correction in the stock markets would not be wholly unsurprising at some point in late 2016 or early 2017.
Finally the most unpredictable aspect for a gold forecast to predict is: War. The increasing tensions in the Middles East, the war in Syria becoming even more dogged and the Russo-Turkey saga that arose towards the end of the year, it is likely to impact the gold price in 2016. Sadly war and conflict create uncertainty and gold is often the counter-weight to such instability. With that in mind, gold as a reliable hedge will start to look very attractive again, not only to those who want some physical insurance but also to the paper market wanting a bit of cover.
The gold forecast for 2016 is complex. Gold is mercurial and affected by currency, supply & demand, war and even Chinese whispers. Gold is a constant and I for one am intrigued for 2016.
Article by Michael Cooper
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Slim Gold Price Range Ahead of FOMC Meeting Next Week
It is the 11th of December and suddenly it has turned cold and at last it feels like winter. I’m still persevering with my Christmas jumper (a blue cross-stitch endowed with white snowflakes) but I’m having the last laugh; at least I’m warm. The gold price at the moment is doing anything but warming my cockles. It would appear that the Federal Open Market Committee (FOMC) are at last baying to commentators such as myself, who have been writing articles about the eventuality for the last year and a half. Finally they deem we are in a position to raise the interest rate from historic lows of 0.25%. But will they do it? I can’t believe I’m saying this but I actually think they might do it. Finally. I feel a modicum of reprieve but the gratification doesn’t last long as it is now finally time to turn to commodities and what they have been doing and what they might do.
At the moment gold has been trading in a well worn path. In the last two weeks the gold price range was trading $32.1, £16.55 and €33.80 respectively. A macro look at gold will tell you that this size of gold price range has been on-going for the last couple of months and at times has been even more tentative throughout the year. The average in each currency was $1067.77, £708.67 and €994.27 with the mode (the most frequent value) being $1055, £708 or £705 and in Euros it could be four different variants €998, €994, €986 or €977. This suggests a lot more about currency than it does about the rates rise, although everything is inextricably linked in the long term.
The notably slim gold price range combined with other data, all point towards downward pressure on the precious metal markets. Unsurprisingly over the last few days there have been significant outflows from ETFs including large name players such as Schroders, SPDR and Comex Gold Trust. Naturally all this information points towards the FOMC meeting and the interest rates. The market is waiting and these numbers suggest this definitely the case.
With the increase in the interest rates will almost certainly lead to a stronger dollar. The FOMC are all too aware of the dollar’s potential for continuing strength in 2016. Looking forward there is going to be significant pressure on commodities across the board and most significantly on oil. The lower pricing of brent crude oil and the effect that has on the metals market, ultimately means operational costs will fall for extraction and delivery. This will do little to boost the gold price.
In all, I already am coming to my own conclusions on what will happen to the gold price especially after looking at the slim gold price range. But the markets both domestically in the US and further afield, is what I’m most interested in – I’ve already written some scenarios about What Will Happen to Equities & Gold when the interest rates rise. As is often the case in life, you wait for something to happen for so long, when it arrives the ecstasy of that moment is so much duller than you initially thought it would be. 2016 is going to be the year of normalisation and reaction. I for one am looking forward to it.
Article by Michael Cooper