Special Report: Gold Outlook 2017: How to Profit from Gold's Bull Run

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With a relatively strong U.S. dollar in recent years, the gold price in terms of dollars has struggled. But before discussing the outlook for gold, some context is important.

The price of gold was below $300 per ounce in 2001. It went up to about $1,000 per ounce in 2008 and then fell back to almost $700 in late 2008 with the deep recession. It then began another march upward to an eventual $1,900 in 2011 before falling back down between $1,600 and $1,700 at the beginning of 2012 and holding relatively steady for the remainder of that year. 2013 brought about a massive correction as gold fell from around $1,650 an ounce to under $1,100 by late 2015. But last year, with rising uncertainty about global economies and a British exit from the EU, we saw a relatively steady climb back to the $1,300 per ounce level.

From 2000 to 2012, gold ended the calendar year up from the year before every time. It is almost unprecedented for anything to go up for 12 straight years, even in nominal terms.

From 1981 to 2000, gold was an overall terrible investment, at least for people buying and holding. From 2000 until 2012, gold had been an excellent investment if you bought it and held it in 2000, despite the roller coaster ride.

While we have seen bullish times for gold over the past year, we are likely to see more bullish times ahead. It is not so much a question of “if”, but questions of “when” and “how much.”

Gold in 2017

The price of gold took quite a hit in 2015. Gold investors were encouraged towards the end of the year when the price rose to around $1,200. But in the matter of a few weeks, it fell below $1,100, hitting five-year lows.

Just as with other commodities, some of the hit to the dollar price of gold was a reflection of the strong U.S. dollar. For a European who owned gold, he did okay in terms of the price of gold in euros over the course of 2015.

2016 proved to be a banner year for gold investors as the price rose more than 30% in the first three quarters before taking a slight hit in early October. That drop was partly fueled by renewed Brexit fears as announcements came out that the UK would begin the process of removing itself from the EU by March of 2017. But it was also fueled by investors, concerned about the world’s economic outlook flocking to the U.S. dollar as a safe haven from potential losses in equity markets. Remember, a strong U.S. dollar means lower prices for gold.

Before getting to predictions, let’s take a brief look at the history of gold prices.

The late 1970s was good to gold investors, especially if they sold before 1980. It is easy to forget that owning some forms of physical gold was illegal from 1933 to 1974. It became legal again after the dollar was broken from its link to gold. Nixon officially ended the dollar as part of the international gold standard in 1971. Other countries could no longer redeem their dollars for gold.

It is no coincidence that we saw the worst price inflation in modern U.S. history after the 1971 break from gold. The fear and inflation of the 1970s led to a bubble in the gold market. Paul Volcker came in as the chairman of the Federal Reserve and drastically tightened interest rates and slammed on the monetary brakes.

Gold briefly peaked above $800 per ounce in 1980. After that, it was two decades of a bear market for gold.

It was not until the beginning of the 21st century that gold saw another big bull run. Some might mark the beginning as September 11, 2001. I would mark the beginning as when Gordon Brown (future Prime Minister) sold about half of the United Kingdom’s gold between 1999 and 2002.

Anyone who bought gold below $300 around this time has done very well, even with the bumpy ups and downs. Gold went up to $1,000 per ounce, but briefly had a significant pullback during the financial crisis of late 2008. Gold then proceeded to hit a new all-time high, briefly hitting an intraday high of just over $1,900 in 2011. It is now trading just below $1,250.

In inflation-adjusted terms, gold has still not hit its all-time high since 1981. It has been over 35 years. To hit that high again adjusted for inflation would mean we would have to see gold hit around $2,500. But this is a rather meaningless number because that brief high in 1980 was the peak of a major bubble.

The Uniqueness of Gold

While gold tends to be highly correlated with silver, gold is really a metal like none other. It has a long history of being used as money, a characteristic which only silver shares.

But gold is much different than silver in several ways. Gold is used for industrial purposes, but to a lesser extent than silver. Gold is far less volatile than silver, which makes it better to own during a roller coaster economy because the bumps are a bit smoother. Silver is typically better to own during bull markets, but you don’t want to be stuck with silver in a bear market.

Perhaps the biggest difference between the two metals is that gold is owned by central banks. We don’t hear about central banks holding silver reserves. It is possible, but we don’t know of this being the case.

Central banks holding gold reserves was actually a bearish factor for gold in the 1980s and 1990s. It seemed that the big players were more likely to be selling than buying. We have seen the winds change here over the last decade. Perhaps the biggest difference is China, as the Chinese central bank seems to be continuing to accumulate gold reserves.

I don’t know if we can count on this to continue, but I don’t envision any major selling of gold by central banks around the world. If anything, China is putting something of a floor on the gold price, buying more on price dips.

In terms of owning gold, there are really two purposes. One purpose is simply as something of an insurance policy. Gold is a hedge against money depreciation and fear and global instability. It is always good to have some gold holdings in your portfolio. I recommend around 20%.

These holdings should reflect the price of gold. You should not substitute gold stocks as part of your core holdings.

The second purpose for owning gold is like any other investment. It is to make a profit. That is where the predictions come in.

The 2017 Roller Coaster

It is impossible to make predictions of these kinds with any certainty or accuracy in regards to timing. Still, we can do our best to see what the likely scenarios are and whether it makes sense as a speculation in terms of risk versus reward.

In late 2008, we saw gold fall with the economy. In a deep recession, there is a high demand for money. People look to move to cash. Despite the fear, some gold investors sold. It was not long lasting, as the Fed’s “quantitative easing” quickly pushed gold prices back up.

While I think another recession is somewhat likely in the near future, I am not scared about owning gold. At the beginning of 2016, stock investors were given a bit of a scare when markets sold off as fear of numerous rate increases drove down equities. But the key here is that gold prices actually went up almost as drastically as stock prices went down. And as the markets recovered, gold continued to hold its elevated price level, even moving up slightly more over the course of the year.

Therefore, weakness in the economy is not scaring me right now in terms of owning gold. It is possible that the U.S. dollar could strengthen even more, but how far is it really going to go? This is more of a reflection of the weakness of the other major currencies and non-gold investors looking to the U.S. dollar as a safe haven.

The only problem for gold right now is that many investors are just not that interested in owning it. There are always gold bugs who like gold. There will always be a tiny percentage of people who will own it no matter what. But on the margin, investors are not excited about gold right now.

If you have 20% of your portfolio in gold-related investments as I recommend, then you really don’t need to change a thing. If you are looking for short-term profits, then you have to pick your buying spots.

Gold will have several support levels in 2017. The first will be at around $1,200. If gold breaks through this level to the downside, we can expect it to continue to slide to the next support at $1,100.

If gold goes below $1,100, you should definitely be buying if you are looking at buying at all. In fact, anything near that mark should be a buy. I am expecting a range of $1,200 to $1,400 in 2017. This is based on current information.

Central banks and investment banks alike have stepped up gold buying activities this year and are purchasing large amounts of gold bullion. Leading hedge funds are endorsing gold as a core investment and exiting stocks. As long as global economic uncertainty persists, we will continue to see increasing interest in gold as a safe haven. And as with any commodity, increased interest will translate to increased prices.

If things change quickly, however, then the strategy might need to be changed.

A weak economy may ultimately mean higher gold prices. If there is enough weakness to get the Fed to start another round of QE (money creation) or reduce interest rates, then this is when investors will need to become buyers. It won’t be so much of a bet for gold as it will be a bet against the dollar.

If we do hit a point of the Fed making an announcement of more QE or lower rates, then you should get into your speculations at that point, regardless of the price. A new QE announcement or a return to zero interest rate policy would spark a massive bull run in gold. If you want to speculate, you should consider putting equal amounts into silver and gold. But your core gold holdings should stay there and this does not include silver. Silver is not a core holding, unless you want a small token amount. Silver should be mostly for speculation.

Before this is all over, we are going to see another bubble in gold. We may still reach that 1980 all-time high adjusted for inflation. It isn’t going to happen in 2017 though. 2017 will be the year to get set for a continuation of the bull run that started this year. While 2016 might have been more like 2001, when we one day look back and wish we would have bought more when it was so low, 2017 will still be a positive year for gold investors and buying while the metal is priced low will pay off in the long run.

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