The gold market has been on a tear, recently climbing to a fresh 5-month high. Investors around the globe are pouring into gold as a safe-haven asset.
Some may wonder if gold is overpriced at current levels following the recent gains. To the contrary, most professional investors believe the gold market is going to continue higher from here.
At the end of March, Thomson Reuters GFMS released its Gold Survey 2017, which analyzes developments in the gold market and looks at the trend for prices. Here are the main findings of the report.
The GFMS team sees continued demand for gold as a safe-haven investment especially around two key potential “Black Swan” events – unforeseen events that disrupt and shock financial markets. Here’s two they highlighted:
- Anti-EU election result in one of the European nations.
- Unorthodox policies adopted by President Trump
Other potential black swan events include:
- U.S. equity market downturn
- Risk aversion due to heightened geopolitical tensions
Analysts say if any of these events unfold gold prices are expected to move significantly higher.
4 More Gold Bullish Factors
Central Banks continue to buy gold. In 2016, central buyers were net buyers of gold for the seventh year in a row. GFMS forecasts 250 tonnes of central bank gold purchases in 2017. Russia is expected to lead in purchases, with China closely behind it.
Wealthy Chinese citizens are buying physical gold. Another highly respected gold organization also released its 2017 outlook recently. The consultancy Metals Focus said in its Gold Focus 2017 report that China’s private gold investment rose in 2016. This includes wealthy households, family offices, and professional investors who wanted protection from the weakening Chinese currency and diversification following the January 2016 crash in the Shanghai and Shenzhen stock market.
Real interest rates are negative. The Metals Focus report called the U.S. Federal Reserve’s policies “gold friendly,” as it fails to keep pace from inflation. The authors emphasized the importance of “real interest rates.”
Real interest rate = interest rate minus the rate of inflation
U.S. CPI numbers have climbed above the Fed’s target rate. On a year-over-year basis, the March consumer price index showed a 2.4% gain and that compares to the Fed funds rate currently at 0.75-1.00%.
Key takeaway: the U.S. real interest rate is negative right now.
The supply/demand forecasts for 2017 show a deficit. That means higher gold prices ahead.
Is your portfolio properly diversified? Many Blanchard clients are choosing to re-balance their portfolios and trim equity exposure following the first quarter rally in stocks. They are shifting a portion of those profits into physical gold and silver. Contact Blanchard for a personalized portfolio review at 1-800-880-4653.