Download now: The Downfall of Cable, and the Rise of 5G!

2015: A Look Back at Gold

Another Tough Year for Gold

Written by Geoffrey Pike
Posted December 10, 2015

2015holdAs 2015 wraps up, it is time to reflect on gold and its performance in 2015. From there, we can consider whether it should be a New Year’s resolution to buy gold.

In terms of U.S. dollars, the price of gold started out at the beginning of 2015 trading at about $1,200 per ounce. It was going up early on, briefly touching $1,300. But things quickly reversed, and the rest of the year was mostly down in terms of dollars, with some occasional pops in between.

With the current price of gold trading under $1,100 per ounce, we are going to see another down year for gold prices, assuming nothing major happens in the next few weeks.

Since its all-time nominal high in 2011, and another brief peak in 2012, it has been mostly down for gold since that time. It finished higher for 12 straight years, and now we are seeing some of the steam come out.

Perhaps the biggest question is whether we are in a bear market in gold (and other commodities) or if we are in a temporary bearish state within a broader bull market. Are we going to see a continuation any time soon of the great bull run of the 2000s?

Notice when I speak of the gold price, I am careful to specify that it is in terms of U.S. dollars. Because that is the real story here, especially for 2015.

The U.S. dollar index was below 90 at the start of 2015. It recently hit 100 before falling back a little to just under 99. In other words, most of the downward move in the price of gold in 2015 is really just a reflection of the strong U.S. dollar. Perhaps it would be even more accurate to say that it is a reflection of the other really weak major currencies of the world.

If you had bought gold with euros at the beginning of the year, you could sell that gold for about the same number of euros now, or even a little more. With negative interest rates a reality for some parts of Europe, gold would have actually been a decent investment in Europe for 2015. Of course, converting euros to dollars would have been a better investment.

Will Gold Go Up From Here?

The dollar has already had a huge run in 2015. While I am not predicting it will go down significantly any time soon, I also don’t think it is going to be as much of a factor going forward.

In many ways, it makes sense that gold has been stagnant at best, particularly over the last year. The Federal Reserve’s last round of quantitative easing (QE3) ended over a year ago. This relatively tighter monetary policy is not bullish for gold.

Now the Fed is threatening to raise its key interest rate, which may not mean that much, but is still not bullish for gold.

In terms of owning gold for an investment, I think it is wise for every investor to own some gold and gold-related investments. It is something of an insurance policy against disaster. It is a hedge against government and central banks. It is also a good way to diversify your portfolio.

But in terms of a speculation to make a quick profit, I currently have my doubts about gold. The problem right now is that most investors just aren’t that interested in it. Price inflation is supposedly very low – if you believe the government’s data – which means there is less attention paid to inflation hedges.

There are a number of things that could turn around the negative sentiment towards gold, but I think there is one thing in particular that can give the metal a big boost. That something is another round of money creation (QE) by the Fed.

The only thing that is likely to persuade the Fed to do this any time soon is if we hit a major economic downturn. Either a stock market crash or an official recession (or both) would likely generate talk and action by the Fed in starting another round of digital money printing.

It almost seems contradictory because gold and other commodities do not typically perform well during economic recessions, especially when coupled with relatively low price inflation. When times are tough, cash is king. Sometimes government bonds are king too. It is a time of high money demand and liquidation of assets.

So if the Fed’s currently tight monetary stance leads to a recession, we may see gold fall below $1,000. But this could ultimately lead to a much higher price if the Fed reacts with more digital money.

Let’s assume that there is no recession or that, if there is a recession, the Fed reacts with more money printing. If that is the case, then we should not expect to see the gold price fall below $1,000. If it does, it should be very temporary.

While China has its own economic problems, the Chinese central bank is still buying gold. With the latest move by the IMF to include the yuan as part of its reserve basket of currencies, the Chinese continue to look for prestige. We should expect more gold buying, which helps put a floor under the price of gold.

There are a lot of variables for the gold price including global demand (including central banks), global supply, and economic conditions. The dollar should be less of a factor going forward, at least in relation to other currencies.

I am not seeing a new bull run happen in the first half of 2016. If the Fed surprises us later on with a looser monetary policy, we might see things pick up later in the year.

Still, it is always a good idea to have at least 15% as part of your core portfolio. If the price dips below $1,000, it is a good opportunity to add to your holdings.

If I see a new bull run forming, I am not going for the gold coins and ETFs anyway. It will be time to buy gold stocks, which have been beaten down far worse than the actual metal price. That is where the big profits will be eventually.

Buffett's Envy: 50% Annual Returns, Guaranteed