Could 2017 Mark a Major Turnaround for Gold and Silver?

2016to2017The gold and silver markets limped across the finish line to end 2016. Although gold saw significant strength to begin last year, that strength began to wane as equity markets found more solid footing and as the economy continued to make further progress.

Although no one knows exactly how these key precious metals may perform in the New Year, examining what drove them in 2016 may be useful in determining what may drive them in the year ahead. It may also be worth keeping in mind that many of the key issues that fueled the rally in gold and silver to begin last year are still relevant today and could potentially fuel price action once again.

The three key factors that drove higher gold and silver in early 2016 were:

  1. Declining equity markets
  2. A slowing Chinese economy
  3. Quantitative easing and low interest rates

Stock markets got off to a terrible start to begin 2016, and worries over China fueled a selloff that saw the Dow get off to its worst start on record. Crude oil prices declined below $30 per barrel in another sign of deflationary forces taking hold. As the selling intensified, some likely assumed that the multi-year rally in stocks had finally come to a close.

China is the world’s second largest economy, and the globe has looked to China to foster economic growth. Some analysts might argue, however, that the pace of growth China had seen is simply not sustainable. China also has its share of debt issues that will need to be dealt with, as well, and the term “bubble” is still frequently used when talking about the Chinese economy. The pace of growth in the Chinese economy has slowed dramatically, and 2016 likely marked even slower growth than the year before, which was reportedly the slowest pace in 25 years.

In the year 2016 we saw ongoing quantitative easing in some areas of the world and a continuation of ultra-low rate monetary policies. Although the U.S. just raised rates in December for the second time in a year, rates are still very low. It was not long ago that analysts suggested that four interest rate hikes would likely be seen in 2016, yet the central bank managed to hike only once. Looking at the year ahead, the Fed adjusted its dot-plot to now forecast three interest rate hikes rather than two. You have to wonder, however, if the Fed will actually look to tighten that quickly.

Outside of the U.S., QE was alive and well in several economies including Japan and the European Union. Negative interest rates were a widely publicized issue in 2016, as yields on key debt instruments such as German bunds dipped into negative territory.

All of these issues were supportive for gold and silver, and could potentially continue to keep a floor under gold and silver prices in the New Year.

Is a Major Turning Point Ahead?

A lot has changed over the last year, and certainly over the last several months. Gold and silver prices have declined sharply from highs reached earlier in the year, and for the time being it seems that more downside could potentially be seen.

Numerous reasons have been given for gold and silver’s recent decline, including the potential for rising inflation, higher interest rates and a stronger dollar index. That being said, the precious metals markets may have been oversold. Given the amount of unknowns heading into 2017 and a Trump Presidential administration, gold and silver may find their shine again sooner than many realize.

There are numerous issues that could potentially fuel buying in gold and silver in what could mark the beginning of a new multi-year move higher.

It’s no secret that markets have risen substantially since the early November Presidential election. Donald Trump’s victory was first met with selling and risk aversion (just look at stock index futures or bond futures from election night) that quickly turned into buying and a “risk-on’ mentality.

Stocks have risen sharply making new all-time highs in the process while bonds and notes sold-off as interest rates rose dramatically. The dollar index also saw buying, and is trading at the highest levels in years.

The notion of lower taxes, increased fiscal spending and other economic policies has been largely credited with the rise in equities and overall increase in risk appetite.

What remains unclear, however, is exactly what may or may not actually be implemented once Trump takes office later this month.

It would seem that the only way to lower tax revenues while boosting spending is to increase the deficit. Fattening deficits are simply another form of debt-and increasing debt levels can undermine a currency while being supportive for perceived safe haven assets such as gold and silver.

The Trump Factor

There is no doubt that the Trump Presidential victory has brought with it a renewed sense of economic optimism. Many of the key issues that Trump campaigned on such as lower taxes, increased spending, more job creation and other policy changes to “Make America Great Again” have brought out the animal spirits. As already discussed, it remains unclear exactly what policy changes might be seen and their corresponding effects on the economy.

Another key consideration, however, is the potential effects a Trump Presidency could have on key international relations. Some of the most widely discussed issues are likely to be:

  • America’s borders and the possibility of a wall along the Mexican border
  • U.S./China relations
  • The potential for trade wars
  • Changes in import rules
  • Russia
  • Immigration

It would seem that the President-elect has a lot of big plans and international relations and global trade could see some significant changes.

That being said, such plans may carry serious risks as well. A trade war with China, for example, could potentially have drastic consequences not only for the U.S. and China, but for global peace and prosperity as a whole. Key trading partners such as Japan and South Korea would likely feel the effects, and security concerns in Asia could potentially become a major issue.

With so much potential change, and the possibility of friction along the way; gold, silver and other perceived safe haven assets could find willing buyers in the New Year, especially at or near current price levels.

Is the EU on the Verge of Another Crises?

Brexit could potentially become the tip of the iceberg. Some have suggested that by early next year, the EU could be defunct. Although the chances of a massive breakup of sorts this year may be small, the fact that such an idea is even being discussed speaks volumes as to the amount and magnitude of the problems currently being faced by the EU.

Numerous political and economic issues could pose the most significant challenge yet for the union, and Germany, France and Italy are likely to remain the center of attention.

Although the financial crises of 2008 seems like a long time ago, many of the same issues that almost toppled the global economy are still being dealt with today. Bad loans continue to be a significant weight on the European banking system, and a new crisis could potentially emerge.

In the headlines recently, the oldest lender in the world, Italy’s Monte Dei Paschi, is in the midst of a recapitalization process. The rest of the EU and even the world will be watching closely, as this is not the only European lender under duress.

The IMF recently referred to Germany’s Deutsche Bank as the “riskiest financial institution in the world as a potential source of external shocks to the financial system.” The embattled bank has been the subject of numerous regulatory issues and lawsuits, and has seen its stock price reach record lows.

In a recent survey performed by Morgan Stanley, investors reportedly ranked a disintegration of the European Union as the #1 geopolitical risk of 2017.

Stagflation, Anyone?

Some economists have voiced concerns that Trump’s plans may provide the economy a boost in the near-term, but may not provide a long-term path to sustainable growth. While lower taxes and massive fiscal spending could be highly inflationary and could boost economic output, some have suggested that any gains seen in output could be offset by Trump’s other policies.

In a recent Bloomberg.com article, Goldman Sachs economists Alec Phillips and Sven Jari Stehn wrote: “The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects. However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term.”

Goldman Sachs has not been the only bank to warn about the possibility of deflation, and the extent of such a scenario largely depends on what policies are actually enacted.

Rising inflationary pressures in the face of a slowing economy and rising unemployment could potentially fuel buying interest in gold, silver and other hard assets which may be seen as a potential hedge against rising prices.

The Year Ahead

In 2017, there could potentially be significant changes to U.S. economic and geopolitical policies. The New Year could also see further difficulties in the Eurozone and additional signs of a bubble in China.

With many of these changes and the risks currently being faced by the global economy, the potential for a great asset rotation may exist.

Now may be a good time to take stock and reevaluate. Stocks have been moving higher for almost eight years now, and one need only look at a chart of past equity market crashes to see just how fast markets can fall-potentially wiping out billions of investor value at the same time.

Gold and silver have been on the decline for several years now, but could be showing some key signs of a reversal.

The recent bearish sentiment surrounding gold and silver and the corresponding investor stampede out of paper gold assets may be a significant clue that these markets have reached or are close to finding a bottom. Such extreme negative sentiment in a market is often associated with a major turning point, and gold and silver could potentially be close to the bottom-if they have not reached one yet already.

The world is still awash in ultra-low interest rates, debt and QE. Global growth remains a major source of concern, and many of the challenges that currently exist are not likely to go away anytime soon.

The same reasons many investors were so bullish on gold and silver in recent years still exist today. Not only do these metals have the potential for significant price appreciation from current price levels, but they may also potentially serve as a hedge against a number of economic and geopolitical issues.

This year could possibly mark a major turnaround for gold and silver, and these markets could be getting ready for a major multi-year run higher that has the potential to take prices to previous all-time highs and beyond.

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.