In this CNBC video, “More Gains Ahead for Gold Miners,” gold analysts Larry McDonald with ACG Analytics and Craig Johnson with Piper Jaffrey give their opinions on where the price of gold today may be heading.
Over the first 6 months of 2016, we’ve seen the price of gold rise dramatically, up 25%. Not since the first half of 1974 has the yellow metal, as many call it, had such a substantial move. Furthermore, many analysts predict that gold bullion has further to rise from the $1,300 per ounce level to as much as $1,500 this year. The all-time high in the price of gold is $1,900.
Holdings in gold-backed exchange traded funds (ETFs) have risen 33 percent this year (in terms of tons), the biggest first-half increase since 2009. Investors have traded 28.7 million future contracts on the Comex (Commodity Exchange), the busiest first quarter on record, based on data compiled by Bloomberg. Investment banks Goldman Sachs and Morgan Stanley have raised their target prices for gold for both 2016 and 2017.
But what has caused the big jump in the price of gold today and the demand for gold?
The price of gold has staged such an impressive rally this year due to three reasons: global political and economic instability (including the recent Brexit situation), US interest rates remaining fairly constant and the US dollar weakening slightly to start 2016.
Gold is often seen as a safe haven when economic and political turmoil arise. In fact, gold has maintained its purchasing power as an alternate currency for 2000 years. So far in 2016 we’ve seen market turmoil after the recent U.K. vote to leave the European Union and a host of other global financial concerns. The surprise EU vote threatens to fragment the world’s largest trading bloc should Britain actually withdraw from the EU, while also calling into question the future of the United Kingdom as a country (with the possibility of Scottish and northern Irish independence). Weak economic growth around the world, including in China, have exacerbated the situation and have had investors and fund managers seeking the safety of gold. The upcoming US presidential election and it’s uncertainties for the world’s largest economy further has investors seeking safe-haven assets.
Being a commodity, gold does not pay a fixed rate of interest, as bonds or even some consistent dividend paying stocks do. As such, when interest rates decline or even remain constant, investors seek alternative investments such as gold in the hope of achieving higher returns. This has been the case so far in 2016 with Janet Yellen and the Federal Reserve holding off on bumping up the Federal Funds rate to keep economic growth and inflation under control. In fact, as based on forward indicators (the 30-day Fed Fund futures), a chance of an interest rate decrease in the US is more prevalent than an increase.
As 2016 began, many economic pundits were strongly predicting that interest rates in the US would finally begin to rise. However, this has not been the case with slower economic growth here as well. This slower growth has kept a lid on interest rate increases. When interest rates decline (or in this case remain constant), investors move their capital to countries/currencies paying a higher rate. This in turn can increase the value of a country’s currency. Given that gold is priced in US dollars, when the US dollar declines in value, the metal becomes cheaper to purchase by foreign investors. With central banks around the world attempting to devalue their currencies to remain competitive, gold may be the only hard currency to maintain its value.
As part of a well-diversified investment portfolio, gold has its place in the commodities portion of your portfolio. Commodities should be in the area of 2.5% to 10% of a balanced, long-term portfolio of investments. Given that most gold analysts and investment managers feel that the price of gold could rise further, holding a higher weight in commodities may be a wise move.
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