Fortunately for the gold market, the year will soon be coming to a close. For many weary gold bulls, the closing of the books on 2016 cannot come soon enough. Despite the selling seen in the yellow metal over the last several weeks, however, it should be noted that gold is still up on the year.
Better days could potentially lie ahead for gold, and the start of the New Year could bring with it some very interesting changes and market action. Although all may seem well today, the global economy has numerous issues that could potentially put a halt to the current rally in risk assets and put a bid back into gold and other perceived safe haven assets.
For starters, the current rally in stocks and the dollar is built upon nothing more than hot air. Plans for tax cuts, increased fiscal spending and job creation all sound fine and great, but thus far that’s all it is-talk.
Although stocks could see an ongoing boost if such measures were in fact implemented, there are two key considerations:
- It remains unclear if tax cuts, a massive infrastructure spending program and other potential economic policies will pass muster with Congress.
- According to some analysts, the effects of such measures may not provide any long-term sustainable boost to growth.
In other words, the markets could be setting themselves up for disappointment. The current rally may march on into the first several weeks or months into Trump’s first term, but investors will soon begin to get a clearer picture on what may or may not be expected from a policy standpoint.
Like an overinflated balloon, if investors begin to get the sense that changes in policy are lacking in the “shock and awe” department, much of the hot air from the rally may be released, deflating stock prices along with it.
An equity market that begins to show signs of cracking could potentially be very bullish for gold, and the yellow metal could potentially benefit from a significant asset rotation sometime in the New Year.
We also feel that China could be a very large wildcard in more ways than one, and that the world’s second largest economy could potentially have a big impact on gold prices in the year to come.
It is no secret that China is going to have to deal with its own debt issues at some point, and that the Chinese economy may not be as strong as believed. Worries over China put stock investors on the defensive to start 2016, and some equity markets got off to their worst start to the year on record. Although stocks may head into the New Year with a full head of steam, worries over China can resurface quickly and have the power to put a significant dent into global appetite for risk.
As if this was not enough, markets will now also likely pay close attention to Trump’s dealings with China. Trump has made it clear that he intends on taking a hard line with China, and relations between the two counties could potentially see some changes this year. A trade war or other issues could potentially ignite a flight to safety that could possibly benefit gold and other perceived safe haven assets.
Gold may see a renewed interest in the coming weeks. For the time being, the market may remain on the defensive, and prices could head even lower than the recent lows. Once much of the current euphoria begins to subside, however, and the dust begins to settle, gold may once again shine as investors look to diversify away from risk assets.
At current price levels or even lower, we believe that gold represents an excellent value for the long-term investor and that gold will once again see higher prices in the year ahead while potentially providing a meaningful hedge against many of the potential economic and geopolitical issues that could surface.