Gold – the safe haven asset of choice during uncertain economic times – is having a bad year. Granted, it’s seen worse, but it’s still down about $100 per ounce. And with commodities as a whole facing a tough global economy, gold doesn’t have a lot of positive catalysts going for it at first glance.
The U.S. dollar has been the enemy of gold all year long as it’s increased in value relative to other currencies. The central bank actions by other countries such as China, Japan and the Eurozone have only served to further bolster the dollar’s strength – which has been contributing to gold’s weakness. When the Fed raises interest rates, that strength should only become greater as well.
But don’t count out gold just yet. On the surface, gold doesn’t seem to have much going for it, but underneath that is a swirling market with forces that could align in gold’s favor for the upcoming year.
Gold Could Dethrone King Dollar
The dollar has been the champion asset class for 2015, but the reasons behind its climb to the top have more to do with relative valuations rather than solid fundamentals. The central bank actions overseas involving more stimulative packages designed to inject liquidity into their markets also serve to devalue their own currency. When this happens, currencies like the dollar appear more valuable, especially considering our QE program ended more than a year ago and an interest rate hike is on the table for December or early next year.
But as the economy reaches into its sixth bullish year, many signs point to 2016 being the year the markets finally reverse course and enter a bearish environment – or at least a more volatile one – as the U.S. economy continues to send mixed messages and struggles to keep its expansion on track.
Inflation, while starting off this year as deflation, has begun to rise again. The Fed has been pulling out all the stops to stimulate inflation to reach the 2% target rate previously set. Any missteps in rate hikes or untimely raises could throw off the balance of the economy while it’s in a delicate rising rate environment.
In times of uncertain inflation and mixed economic signals, there’s been one asset class that consistently has been strong and viewed as the safe haven for investors around the world: gold. Its inverse relationship with stocks makes it a great contrarian pick if the stock market has indeed hit a top and headed back down over the next 12 months.
Since its earlier highs back in 2011 when it came close to hitting $2,000, gold has lost nearly half its value. But that also could be a reason to buy it while it’s discounted and cheap. Consider that stocks have been on a bull run since 2010, so it makes sense why gold’s value fell. Now, stocks look like they’ve hit a ceiling with only one direction left to go. If 2016 turns out to be a bearish year for stocks, gold’s value should skyrocket.
As the economy lags, gold should start to increase in value. The dollar may be the asset of choice for the moment, but economic uncertainty always has been the green light for gold to soar. Historically, gold has outperformed stocks in recessionary markets – a trend likely to repeat in 2016. Considering how far it has fallen, gold could be the best buy for investors in the upcoming year.