Your Gold Price Blueprint for 2017

It’s a new year, and I thought I’d start with a favourite topic of mine: gold!

The precious metal has started strong. It’s currently trading around US$1,180. However, in the final days before Christmas the yellow metal was heading south. It closed the year around US$1,130.

Does the strong bounce for gold means the price slump is over? Nup. Not at all. But before I get Jim Rickards to lay out the gold price action for 2017, let’s have a quick look at the drivers behind gold last year.

Gold did have a strong start to 2016, thanks to the early turmoil from China. It got its second wind from the Brexit. And then the price collapsed as the votes were being counted for the US election.

In saying that, 2016 was a tumultuous year for gold. The precious metal started the year at US$1,060, peaked at US$1,364, and closed around US$1,150…a total yearly gain of 8.4%.

In Aussie dollar terms the price action has been similar. We kicked off 2016 with the gold price AU$1,450 and peaked at AU$1,821. The yellow metal finished up at AU$1,603 for 2016, giving Aussie investors a gain of 10.55%.

Always remember, the gold price has an inverse relationship with the US dollar. When the US dollar is falling (which generally speaking, gives us a stronger Aussie dollar), the gold price is stronger.

This means that the falling gold price has been somewhat offset by a weaker Aussie dollar.

Shortly after Jim returned from the Berlin conference I attended, he sent me this:

Readers are familiar with my intermediate term forecast for gold at US$10,000 per ounce. The reasoning behind that is solid based on the relationship between global money supply and official gold. It will occur quickly when gold is needed to restore confidence in a future systemic collapse; a likely scenario in my view.

But what about the short-term downside? How low could gold go? The US$1,058 low of November 2015 is a reasonable estimate of a floor. The 50% retracement from the US$1,883 high of September 2011 using the US$255 low of September 1999 as a baseline.

But a new low of US$950 per ounce is not out of the question based on Fed tightening and resulting US dollar strength. The US dollar price of gold is simply the inverse of the dollar. A strong dollar typically results in a lower dollar price for gold.

One scenario for $950 gold goes like this:

The Fed expects ‘reflation’ under Trump, and begins leaning in with rate hikes designed to cut off inflation. This would be the result of Yellen’s belief that tight labour markets plus stimulus equals inflation (the Phillips Curve), and her belief that monetary policy acts with a lag (thus the need to act now).

Next, the Trump reflation never happens. Instead Congress pushes back against tax cuts that are not revenue neutral, and opposes big spending plans.

Meanwhile, the economy is not as strong as many believe. We’re in the eighth year of an expansion, so there’s not much bang for the buck in terms of new spending. We will experience diminishing or negative marginal returns to so-called stimulus.

The combination of these three conditions (hawkish Fed, disappointing stimulus, and weak economy) could throw the economy into a technical recession. Once the stock market realises it’s way ahead of itself, there will be a violent correction, which will tighten financial conditions and make matters worse.

By the time the Fed sees its blunder and tries to reverse course, it will be too late. They won’t be able to cut rates enough to steer out of the recession. Negative rates and QE4 won’t be effective. The cheaper Chinese yuan and weak euro will make it impossible to cheapen the dollar as a way out. The stock market could crash 30% or more.

This is the perfect storm for deflation, which could send gold to US$950.

But only temporarily.

From there, either things will get much worse, in which case gold will get the safe haven bid, or the Fed will massively monetise debt to fight deflation, in which case gold will get the inflation bid. Either way, gold could see a drawdown in the months ahead, but nothing will stop its long term rise.

Governments cannot tolerate deflation. If deflation catches the Fed by surprise, the condition will be temporary. Inflation will happen, it’s the only way out from under a massive pile of government debt without an outright default. It’s just a question of time.

So, gold wins in the end, but it could be a volatile ride, with new lows possible. That’s not a bad thing for those still building their positions, especially in gold miners, which are even more volatile than gold. You can use occasional drawdowns to add to your gold holdings, if you like. The recent dip to US$1,124 on December 15 is a good example. Gold was already up to $1,140 late Monday, a nice US$16.00 per ounce or 1.4% gain in five days.

I’m not a day trader and I don’t recommend day trading to readers. I’m just using this case as an example of how ‘down days’ can make for good entry points. Gold is heading much higher. These short-term ups and downs will be viewed in hindsight as irrelevant noise. The big show is yet to come, and the time to accumulate gold is now — while you still can.

If you’ve ever traded gold, you know how wild the price swings are. Here, Jim has laid out the key events behind the gold price for 2017. In spite of gold’s rosy start this year, get ready for the precious metal to fall in the short term.

The upside of this volatility is that gold will present some interesting buying opportunities throughout the year. Speculative gold mining stocks are going to bear the brunt of the selling. But with every selloff comes an opportunity.


Shae Russell,
Editor, Strategic Intelligence

From the Port Phillip Publishing Library

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia