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10 Reasons Gold Prices Will Soar in 2017

Written by Luke Burgess
Posted January 20, 2017

Last year's gold market can be summed up in the famous opening paragraph of the Charles Dickens novel A Tale of Two Cities...

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair...

Following the Federal Reserve's December 2015 interest rate hike (the first in nearly 10 years), the price of gold skyrocketed. In fact, during 1Q 2016, gold prices experienced their largest quarterly gain in three decades.

Global gold demand reached a record 2,335 metric tonnes in the first half of the year. And hundreds of millions of dollars came rushing into the gold and mining markets again. Back in May, I estimated the junior mining market alone raised roughly $200 million through private placement in just 10 weeks.

Then came the Brexit referendum in late June, and gold jumped to well over $1,300 an ounce. All told, the price of gold increased 26% during the first half of 2016.

Gold Prices 1H 2016

Gold Prices 1H 2016

Gold and silver stocks were absolutely killing it. The average gain of the precious metal stocks I specifically recommended to buy in Energy and Capital between November 2015 and July 2016 was 82%, with four stocks reaping triple-digit yields.

Was I proud of that portfolio?

Of course.

Did I get arrogant about it?

Of course. Here was the image I was sending around to my buddies at that time.

But the laughs didn't last. And the gold market's “spring of hope” came to an end.

From there, gold prices dropped week after week leading into November, when the yellow metal really got a blow to the gut following the Trump victory. Between July and December, gold prices lost over 15%, pushing them all the way back down to $1,300/oz.

Gold Prices 2H 2016
Gold Prices 2H 2016

Since then, the price of gold has recovered a bit, now trading at $1,200 an ounce. But the outlook for gold this year is extremely bright. And here are 10 reasons why...

1. Geopolitical Changes

The world is changing. Donald Trump brings protectionist politics back to America for the first time since WWII. And across the pond, strong anti-EU and anti-immigration sentiment now has a “hard Brexit” planned.

This year there will also be key elections in France, the Netherlands, and Germany, all of which have popular anti-EU and anti-immigrant party leaders. There's good reason to suspect that 2017 might be the year the EU really starts to break up.

The rise of protectionism politics in America, the U.K., and elsewhere has already opened a door for other nations, like China, to position themselves as economic globalist leaders.

China's President Xi spoke for the first time at the 2017 World Economic Forum in staunch defense of economic globalization, condemning the rise in protectionism politics in America, the UK, and elsewhere.

The Wall Street Journal reported that President Xi's speech depicted “an effort to fill a vacuum being created by the U.S. stepping back from a global leadership role.”

All of this political and geopolitical change comes with a great deal of risk. Gold is the safe haven asset to own during times of political and geopolitical risk. The yellow metal has historically performed better than any other high-quality liquid asset during periods of crisis.

2. Overvalued U.S. Equity Markets

The U.S. equity markets are overbought. And even the guys who profit the most from heavy trading volume agree. The CEO of TD Ameritrade talked to Bloomberg on Wednesday, saying the Trump rally “got ahead of itself.”

With the surprise of Trump's election victory, investors became dreamy-eyed optimists and overly increased their exposure to risk. Now, they're just keeping their fingers crossed hoping Trump will make good on his promises.

Whether that happens or not is left to be seen. But it's very unlikely that Trump will be able to make any immediate or significant positive economic impact. And all of the hope and expectations are already priced into the market.

Without some major announcement or event, the U.S. equity markets could have just topped for the time being. And stagnation or decline in American equity markets is positive for gold as a safe-haven hedge.

3. Continued Economic Growth in Asia

Asian economies are still growing at unprecedented rates and will drive gold demand. Last year, China's economy grew by 6.7%, and it is expected to grow again by 6.8% this year. India's GDP grew by over 7% last year and is expect to grow again by 7.7% in 2017, making it the fastest-growing economy.

There is a strong correlation between increasing wealth in Asian economies and gold demand. In the early 1990s, before the Chinese and Indian economies really began to develop, their combined share of world gold demand was about 25%. Last year, China and India accounted for more than 50% of the world's total gold demand.

It's expected that Asia will account for around 60% of global growth this year and should significantly contribute to rising gold demand.

4. Growing National and Personal Debt

Around the world, there is over $150 trillion in debt. Here in the U.S., our federal debt is now over $19.96 trillion.

When the U.S. public debt hits $20 trillion — which will be any day now — it will be national and international news and add a new level of uncertainty and doubt to the U.S. economy.

The price of gold has a strong correlation with U.S. federal debt that extends beyond fears. That's because, even though they're no longer coupled under the Bretton Woods system, the U.S. dollar and gold still exist as primary competitors for wealth storage. And the value of the dollar is inseparably linked to U.S. federal debt.

US Debt and Gold Jan 2017

Meanwhile, household debt in America is rapidly on the rise.

Since the beginning of 2015, the average American household has increased its debt (including mortgages) by 5.5%. New data from the Federal Reserve Bank of New York and the U.S. Census Bureau show the average American household has $132,529 in debt. Here’s what the typical household is carrying in debt:

American Household Debt Breakdown Jan 2017

From here, American household debt is expected to increase over 14% over the next four years.

American Household Debt Jan 2017

And this rising household debt is not limited to America. Household debt in England and other EU countries is at an all-time high. At the end of November, the Bank of England said total British household debt was £192 billion ($235 billion), not including student debt.

Gold prices do not have any direct correlation with household debt. However, high levels of household debt correlate with economic uncertainty and doubt, which bodes well for safe-haven assets like gold.

5. Globally Rising Inflation

U.S. inflation increased to 2.3% in December, the highest level in five years. All throughout 2016, key Fed members have said they wanted to increase inflation to their target of 2%. But both Fed Chair Janet Yellen and San Francisco Fed President John Williams have argued for increasing the Fed's inflation target. So we could see even higher consumer prices here in the U.S.

Worldwide, inflation is also on the rise. German inflation hit its highest level since 2013 in December; meanwhile, U.K inflation hit a two-year high. And inflation is on the rise elsewhere in Europe.

Meanwhile in Asia, Chinese inflation was at its highest level since 2011 in December, and the Bank of Japan is looking to increase its own 2% inflation target.

It's clear that a deflationary threat to gold has subsided and the world is headed back into an inflationary period. Inflation makes bonds and other fixed income assets less appealing and helps to keep interest rates low. Gold has historically acted as a hedge to inflation and typically experiences heavy price gains due to increased demand.

6. Rapid Increase in Gold Availability

The rise of the Internet, followed by gold ETFs and other new gold-backed investment products, has made gold easier than ever to access. I can buy physical gold online at 3 o'clock in the morning, and several hours later buy a leveraged ETF or one specifically focused on junior miners.

It has taken the rest of the world some time to catch up. But gold-backed investment products have proliferated all over the world, particularly with the new Shanghai Gold Exchange, which is now the largest gold exchange in the world. Chinese investors bought over 30 metric tonnes of gold through ETFs last year — nearly six times more than they did in 2015.

A month and a half ago, China actually took steps to restrict gold access with import quotas. But on Tuesday, President Xi stunned the world at the World Economic Forum when he spoke out in staunch defense of economic globalization. So the tides may be turning for those import quotas.

But the real game changer may be the new Shari’ah standard on gold. Over the past several years, there has been much debate over whether Shari’ah law allows a Muslim to own gold for investment purposes. But in December, the Accounting and Auditing Organization for Islamic Financial Institutions set an official standard, which allows Muslims to own gold as an investment and even invest in gold mining stocks.

Now consider the size of the global Muslim population: 1.3 billion people. According to the Islamic Finance Stability Board, only 1% of the Muslim world's Shari’ah-compliant assets under management being converted to gold would equate to 1,700 metric tonnes (or about $65 billion) in new demand. That's about 40% of the total global demand for gold.

Of course, not even Muslims are going to run right out and buy gold. But as the new Shari’ah standard on gold becomes the norm, global gold demand for investment will have fresh support.

7. Shift to Cashless Economies

The world is going cashless. And it's happening at a shockingly rapid rate. Here's a list of just a few countries that have recently made moves toward cashless economic systems:

  • India
  • China
  • Norway
  • Sweden
  • Denmark
  • Finland
  • Tibet
  • Ukraine
  • Ireland
  • England
  • France
  • Belgium
  • Malaysia
  • Canada
  • Hong Kong
  • Australia
  • Vietnam
  • Most of Africa

Legal tender physical banknotes and coins will become a thing of the past. All financial transactions using legal tender will be digital. And while that might sound fine and even convenient on the surface, consider this: in a completely cashless society, a government would have complete control over its population's money — all of it.

With a single keystroke, governments can already freeze spending accounts. But if all of your spending accounts were frozen and cash simply didn't exist, how would you buy anything? How would you even leave the country?

Cash is freedom. Going cashless is essentially building a financial jail and giving governments and central banks the keys. But in this cashless world, gold will be freedom. That's because, unlike physical or digital currency, gold is the only high-quality asset that's not dependent on someone else's ability to fulfill a promise. And being independent of the digital system, gold would be freedom. You put a price on freedom.

8. Increasing Money Supply

While the Federal Reserve may be looking to tighten its monetary policy, the rest of the world might be looking to loosen up. The ECB announced further quantitative easing measures in 2015, which increased its money supply by 70%. And the most recent ECB minutes suggest strong consensus in favor of another round of QE.

Euro Money Supply M1 Jan 2017

Meanwhile, the balance sheets of Asian countries also continue to expand rapidly. Just this week, the PBOC injected a record 1.13 trillion yuan (US$164 billion) into money markets.

China Money Supply M1 Jan 2017 Japan Money Supply M1 Jan 201
Click to Enlarge

This rapid expansion of money supply will inevitably lead to fears of fiat currency depreciation and create stronger demand for the best alternative to wealth storage: gold.

Gold has vastly outperformed all major fiat currencies over the past century. That's because the availability of gold changes only a little over time — growing at only about 2% annually through mining. Paper money, on the other hand, can be (and is) printed without restraint.

9. Decline in Gold Supplies from Mining

The price of gold has gone up and down over the past several years. But there is one very consistent trend: it's becoming harder and harder for mining companies to get new gold projects started. And a big part of the problem is the lack of new gold discoveries.

Even though exploration budgets have increased more than 10 times over the past decade, new gold discoveries were down 85% compared to 2006.

World Gold Discoveries Jan 2017

What's more, the average grade of the gold ore found at these few new discoveries is in decline. In 2013, Dundee Capital Markets used data from 153 mines and found that the average grade of gold reserves had decreased by 35% in the past 10 years. This lower-quality ore is more expensive (or simply unfeasible) to mine, meaning either less output or higher costs for miners.

All this is leading the gold market into a supply crunch and a “peak gold” scenario. According to BMO Capital Markets, gold mine supply will peak in 2019 and continue into decline for the next five years.

Peak Gold Supply Jan 2017

A supply crunch and a “peak gold” scenario will most certainly lead to increasing gold prices in an environment of heavy demand.

10. Gold Investor Sentiment is Rising

Despite a drop in prices during the second half of the year, 2016 will likely be a record year for gold demand. The World Gold Council reported a 7.4% increase in total gold demand during the first three quarters of 2016, compared to the same period the previous year. And lower prices likely prompted heavy demand as long-term investors sought discounted prices.

BullionVault's Gold Investor Index, which draws information from 42,000 private investors and tracks the balance of net buyers versus net sellers, was at its highest level in four years a few weeks ago, and is trending higher.

BullionVault Gold Investor Index Jan 2017

Gold is already regaining investor favor and will likely continue doing so as we move forward into 2017.

To sum up, here are the 10 trends that will push gold prices higher this year:

1. Geopolitical Changes

2. Overvalued U.S. Equity Markets

3. Continued Economic Growth in Asia

4. Growing National and Personal Debt

5. Globally Rising Inflation

6. Rapid Increase in Gold Availability

7. Shift to Cashless Economies

8. Increasing Money Supply

9. Decline in Gold Supplies from Mining

10. Gold Investor Sentiment is Rising

Until next time,

Luke Burgess Signature

Luke Burgess

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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