If Wall Street analysts were weather forecasters, the extended outlook for gold would be Sunny, and No Chance of Rain.
Gold prices surged to a higher weekly close on Friday, despite last week’s Federal Reserve interest rate increase. Rising inflation, uncertainty over the stability of the European Union, and geopolitical worries support continued gold buying by both professional money managers and individual investors.
On Friday, spot gold traded up to the $1,230 an ounce area, well above the $1,127 area seen in mid-December.
Both Wall Street and Main street players expect the gold market to rally this week, according to the latest Kitco Survey.
Wall Street: 61% analysts surveyed believe gold will continue to rally this week
Main Street: 69% of individual investors surveyed expect gold to continue to gain
How high? In early March, a new BofA Merrill Lynch Global research report outlined the positive backdrop for gold and highlighted a $1,400 per ounce year-end target for the yellow metal.
While gold is benefiting from many avenues right now, concerns about geopolitical tensions are one factor. Let’s take a deeper dive.
President Trump Chooses a Big Stick
Diplomats often talk about choosing between a “carrot” or “stick” policy when it comes to resolving global disputes.
Last week, President Trump unveiled the Administration’s budget proposal for 2018, which made his preference clear for a big stick policy.
The budget proposal offers investors specific clues on the new policy direction. The budget proposal slashes funding to 19 government agencies and directs the funding to massive new military spending – totaling an extra $54 billion to defense spending, along with $4 billion to fund the border wall with Mexico. Meanwhile, the State Department, which offers the “carrot” or diplomatic approach to geopolitical conflict is facing a proposed 28 percent budget cut in the proposal.
This opens the door to a massive military build-up and new missiles, tanks, submarines, shifts and aircrafts. Aerospace and defense sector stocks have been rallying hard in anticipation of the renewed focus on building military might.
Gold is the ultimate safe-haven investment and typically surges higher during times of geopolitical stress, terrorism, military action and war.
Numerous Trigger Points
There are plenty of hot spots around the globe, including: Russia (annexation of Crimea), the dispute over claims to South China Sea, the North Korean nuclear program, Iran’s recent missile test.
Other concerns include the potential for a massive cyber-security attack or data fraud and theft on a large scale and the uncertainty over what the rising populist moving in Europe could mean for the European Union.
There are a number of potential trigger points for conflict at any time. The Trump Administration is focused on increasing military might. Gold is poised to benefit from the escalation of conflict or tensions in numerous hot spots around the world.
Wall Street analysts expect gold to continue rallying. Current price levels around the $1,230 an ounce level could be the best buying opportunity that investors see all year. Use the relatively low levels in gold now to add protection to your portfolio.