The gold price in 2016
Updated January 6, 2016
The last years were turbulent ones for the gold price. Between 2012 and end of 2015 the gold price went down by about 30% as measured in US dollars. The future development of the gold price is of high significance for gold investors. We try to provide some perspectives.
In 2014 the gold price in US dollars was more or less flat, when viewed over the full year. Over the year 2015 the price of gold decreased by about 12% mainly due to rise of the US dollar. In contrast: Measured in Euro, gold only declined by 2% in 2015.
In what direction will the gold price move in the remaining part of 2015 and the years beyond? In the following we will take a look at key determinants of the future gold price.
Supply and Demand
In 2014, jewelry accounted for 55% of the total demand for gold. Investment demand – which comprises demand for bars and coins as well as Exchange Traded Funds (ETFs) and other gold securities – accounted for 23%.
The remaining 22% of the demand for gold came from technology (10%) and central banks (12%).
The overall gold demand measured in tonnes decreased from 4,087.6 tonnes (t) by 4% to 3,923.7t in 2014. The main reason for that decrease was the drop in the demand for gold from China by 33%. Since 2013 was a year of exceptionally strong demand growth from China, a lower demand level for 2014 could be expected.
The slight recovery of India’s demand for gold jewelry, which increased by 8%, as well as the stronger demand coming from the UK and the US were not sufficient to make up for the decreasing demand from China.
In 2014, total investment demand increased by 2% from 885.4t to 904.6t. While the demand for bars and coins fell by 40%, the ETFs’ outflows decreased by 159.1t, which put a lower drag on investment demand than in previous years. Overall, the investment demand level remains now comparable to its pre-crisis level. This could be explained by the fact that the appetite for safe haven investments has diminished since the world economy began to show signs of recovery, especially the for the US economy.
Vaulted gold stored through BullionVault and GoldMoney – two of the largest, bank-independent providers of vaulted gold for private investors – stayed more or less the same since March 2013. Combined, BullionVault and GoldMoney stored about 53 tonnes of vaulted gold for private investors as of March 2015.
The demand from central banks rose by 12% from 409.3t to 477.2t in 2014, which is close to a 50-year high. Uncertainty caused by the political confrontation with the Ukraine and the resulting international sanctions drove Russia to add 173t (36% of total central bank demand 2014) to its reserves.
In contrast, demand for gold in industrial applications has fallen by 5% due to a continuing shift towards alternative materials.
The total gold supply in 2014 was about flat at 4,278 tonnes. In contrast to the increase of mine production by 145t, the supply coming from recycling gold dropped by 140t.
US-dollar and interest rates
The negative correlation between the price for gold and the value of other currencies is well known. In 2014, the exchange rate of the US dollar increased due to signs of recovery of the US economy. This resulted in a declining price of gold measured in US dollars. On the other hand, the gold price in Euro increased by 14% as the Euro weakened vs. the US dollar.
According to analyses from the World Gold Council, interest rates do not have a clear influence on the gold price. Investment demand for gold could be affected by a change in interest rates as high interest rates often increase the opportunity costs of holding gold – which does not pay any interest or dividends – compared to other investment alternatives. But there are other forces at play, e.g., increased inflation fears in times of higher interest rates, which make it difficult to predict a clear correlation.
Crude oil and the stock market
While the gold price remained more or less constant over the full year 2014, the price for crude oil went down dramatically from 115 US dollar per barrel in June 2014 to 49 US$ per barrel in the beginning of 2015. At the start of 2016, the oil price is even lower – currently below 35 US dollars per barrel.
Oil as the most influential energy source contributes substantially to inflationary/ deflationary pressures. Most economists presume that a further decline of the oil price might lead to disinflation or even deflation. The development of the gold price might vary significantly depending on the causes of deflation, but usually real estate and other tangible assets tend to underperform in a deflationary environment.
In contrast to the fall of the oil price, the gold price performed well in the beginning of 2015.
Overall economic situation
2015 started with increased concerns over the health of the global economy due to global events like the negative impact of sharply lower crude oil prices on companies and countries, the growing strains in the euro zone aggravated by the Greek elections, the numerous geopolitical challenges, growing disinflationary pressures in certain regions as well as the potentially growth-curbing effects from the anticipated tightening in Fed monetary policy.
These concerns were reflected in the gold price movements. The fear that Greece might leave the Eurozone contributed to the positive price development in January. The following months were dominated by the fear of a possible interest rate increase by the FED which might have pushed investors away from investing in gold.
Scenarios for gold price development
There remain significant risks of a deflation in some parts of the world. As we know, gold could act as a store of value in both inflationary and deflationary periods.
A strong global economy could drive demand for gold jewelry and investments from emerging markets but could also likely slow down demand from Western investors as perceived economic risks decrease. But gold demand from risk-averse investors has already decreased substantially over the past years.
On the other hand, factors such as a further tightening of interest rates or a global crisis could rapidly bring back awareness of economic risks. The threats for the Euro and Euro-Zone have not yet disappeared – a worsening of the situation could quickly shift investment preferences in the EU and potentially beyond. Geopolitical tensions are strong. The recent conflict between Iran and Saudia Arabia ist just one example. Problems in Ukraine, Turkey and Syria persist further.
Forecasting the gold price
Taking a look at recent predictions by analysts, we can observe that the forecasts vary quite strongly.
According to Commerzbank, the stronger US-dollar will still put pressure on gold prices in the first six months of 2015 due the speculations about interest rates hikes. But once this rise is underway, the pressure is likely to abate in the second half of 2015 and analysts expect to see a short rise of the gold price in 2016.
Contrary to that opinion, ABN AMRO Bank estimates a major drop to US$ 925 per troy ounce in 2015 and a further decline of the gold price in 2016. According to ABN Amro, this decrease would be mainly due to the strong US dollar and higher US interest rates, which would lead to a decrease in investment gold demand.
The World Bank predicts a decrease of the gold price in the long term due the fact that institutional investors would consider gold as less of a “safe haven” investment than in previous years.
Scotia Mocatta – the precious metals division of Scotiabank – predicts a range for the gold price of 950 to 1,280 EU dollars in 2016. According to the analysts, the global economic growth could accelerate in 2016. This should then also improve the demand for gold, since the majority of demand stems from jewelry. New worries by investors about their wealth could trigger an even higher demand for gold and a stronger price in 2016. Such worries could be caused by market corrections or further rising interest rates. After a multi-year correction of the price of gold, gold’s status as a safe-haven for investors could then regain in importance.
The range of forecasts reflects the difficulties in predicting the gold price in the mid- to long-term. There are numerous factors that influence the gold price. In the past, most analysts had a weak track-record in predicting the future gold price. Basically, analyst predictions seem more to follow the actual gold price than to forecast it correctly.
This means that the future gold price can not be predicted reliably. A whole industry of analysts, dealers and others makes a living from forecasting gold prices or predicting rising prices. The prudent investor should form his own opinion and acknowledge the uncertainties.
We believe that due to its unique characteristics gold can act as a diversifier within a balanced investment portfolio. From a risk perspective overall asset allocations to gold should be moderate and the chosen instruments should be based on individual investment objectives.