In Part 1 of this series, we look at four catalysts that could bring gold back to the forefront in the coming year…
Has gold finally reached bottom?
That question has been asked endlessly this year with gold prices having fallen to pre-2010 levels.
With most investors remaining bearish, even the most optimistic of gold bugs can’t seem to give a confident answer as to what will happen next.
Over the past few years, I’ve written at length about the precious metals industry and some of the fundamentals that drive metals prices.
With 2014 just around the corner, I figured this would be an ideal time to revisit some of those key factors and see what changes, if any, will affect gold prices this year.
For the first installment of our two part series, here are four of them:
1) Political Squabble
The infighting between the two US political wings rose to a fever pitch in October as the parties quarreled over the federal budget and debt ceiling.
This resulted in a government shutdown that lasted 16 days and was estimated to have cost the US economy up to $24 billion in lost business spending.
According to economists at Standard & Poor’s, the closure of various government services was projected to have reduced fourth quarter GDP by 0.6%.
And after all that, still there was no solution to either problem other than to stall for another few months.
Chances are, we will see a less than satisfactory compromise to balance the budget and a reluctant concession to raise the debt ceiling, both of which will deal some serious blows to the US credit rating and give support to the gold market.
2) Still-ballooning Debt
On October 17, the day after the government shutdown ended, US debt spiked a record $328 billion to top $17 trillion for the first time ever.
With the debt load continuing to mount and GDP growth taking a hit, our country’s debt-to-GDP ratio remains on a sharp upward trajectory.
This certainly has a negative impact on the purchasing power of the greenback, which in turn makes gold a more attractive investment alternative.
As Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint said “as long as the United States government spends a lot more than it takes in, the debt ceiling will rise as will the price of gold.”
3) Never-ending Stimulus & Global Money Printing
The Fed is now well into its third round of quantitative easing — but their loose monetary efforts to boost economic growth and lower unemployment have bore less than satisfactory fruit.
Although current Chair Ben Bernanke will be stepping down in a few months, his likely successor Janet Yellen is expected to continue the stimulus measures. With some $85 billion in monthly debt purchases, their balance sheet currently stands at more than $3.8 trillion.
There has been some talk of tapering back the purchases at some point, but until unemployment dips below 6.7% and inflation is able to move up in line with GDP growth, the money printing is likely to go on for the foreseeable future.
Japan and nations in Europe have also implemented stimulus programs of their own which is leading to a currency-debasing race to the bottom. By printing boatloads of money with reckless abandon, gold bulls claim they’re certain to be rewarded.
4) Greenback Losing Status
While the US dollar is losing its prestige in the world markets, the Chinese yuan seems to be moving in the opposite direction.
The yuan is making a serious statement in its bid to becoming a global reserve currency. Over the last two years, China has signed a series of currency swaps, including ones with the euro zone and the UK. This allows nations to exchange one currency for another at a set rate and date in the future.
In the Bank of International Settlements survey in September, the yuan was ranked as one of the world’s top ten most frequently traded currencies for the first time ever.
Some economists are already calling for the diminishing role of the US dollar in the global marketplace. Several other nations including Brazil, Russia and India, now have bi-lateral trade agreements that bypass the use of the greenback.
Once again, as the dollar’s purchasing power wanes, investors will be looking to gold as a safe haven for their money.
These factors point to a potential rebound in gold.
The downturn in bullion prices is not indicative of what’s happening in our current economy, or the rest of the world for that matter.
Although this correction is dragging on for far longer than gold bugs would like, this could also be an opportune time to consider buying in or averaging down on gold investments.
When the Fed pulls back its stimulus you can expect gold prices to dip even further as interest rates rise – which could present an even better entry point for investors that have been waiting on the sidelines.
In my next article, I’ll look at four more fundamentals that could push up gold prices in 2014.