Gold: The Year Ahead

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital had the following comments:

After some three years of disappointment, 2015 promises to be a good year for gold investors.

While the near-term price outlook remains uncertain, I feel fairly confident that gold will be considerably higher at this time next year – and on its way to new historic highs in the years ahead.

A number of factors, some interrelated, will drive gold higher.

Here’s my short list of the top gold-price drivers I expect will combine to reestablish the long-term uptrend in the yellow metal’s price.

• U.S. economic performance and monetary policy is key – but under almost any economic scenario, I see gold appreciating.

Despite a few recent positive indicators – and the benefit of lower energy costs – I see the macro economy stumbling in the months ahead. This past year, the gold price has been negatively impacted by expectations the Fed will begin raising interest rates and shifting monetary policy away from accommodation.

Just as the market’s expectations of higher interest rates have been a negative for gold, a reversal in interest-rate expectations will be a plus for gold in the coming year.

• Over the past three years, Wall Street’s booming stock and bond markets have been tough competitors to gold. During this time, institutional investors and traders have shunned gold, preferring to put their money into ordinary stocks and bonds where high returns have seemed assured. One indicator has been the fire-sale of hundreds of tons of metal by exchange-traded funds. These sales have now slowed to a trickle – and much of the metal previously in weak hands has now moved to long-term gold bulls in Asia.

We expect a dose of realism and a substantial correction (or worse) on Wall Street will reverse the flow of investment and speculative funds away from stocks and bonds back into gold.

• Even if I’m wrong and the U.S. economy continues to gather momentum, gold’s long-term prospects still look bright. Under this rosy scenario, renewed Federal Reserve monetary restraint along with higher-than-expected interest rates would scuttle the advance in equity and bond prices, sending a growing number of investors back to gold.

• Don’t forget the insatiable appetite for gold in China, India, and other East Asian markets. Investors in this region will continue buying gold however their economies perform. This year, India and China, the world’s largest gold markets, will have bought over 2000 tons – and this is likely to rise in the year ahead thanks to a relaxation of import restrictions in India and a flight from equity and real-estate investment in China as the economy slips into a lower growth trajectory.

• Last but not least, a growing number of central banks will continue buying gold to diversify their official monetary reserves away from excessive U.S. dollar exposure. Importantly, these are long-term acquisitions and most of this metal will not come back to the market anytime soon, possibly for decades or longer.

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