Direxion Shares Exchange Traded Fund Trust (JNUG): Gold Market Outlook 2017
By Eric Sepanek
Those seeking to secure the value of their portfolios may be wondering, “Is gold a good investment?” A recent report by the World Gold Council titled “Outlook 2017,” suggests the strong demand for gold in 2016 will continue through the end of 2017. The report provides analysis of the global and economic trends that will drive gold buying in the coming year.
While it is well worth one’s time to read the World Gold Council report in full, following is a summary of the market trends supporting a strong demand for gold in 2017:
- Political Risk – The simple reality to most observers is that global economic and political risks are rising. As a preferred safe-haven investment, gold offers those concerned about these risks a highly liquid alternative asset.
- Currency depreciation – The issue of paper currency depreciation is perhaps the most under-reported financial risk today’s investors face. Of particular interest is a chart included in the report that shows how significantly all major fiat currencies have depreciated against gold over the past century. Europe seems to be a primary threat to the world’s currency supply as it continues to employ fiat money to support unsustainable deficit spending and historically high debt levels. The European Central bank alone now holds an astounding 3.6 trillion euro liability.
- Inflation – Even with the U.S. Federal Reserve attempting to implement an extremely modest interest rate increase, the global picture indicates such rates will stay low. This is because so many corporations and governments are now addicted to cheap money, and they simply can’t afford a greater debt service load. This is especially significant as inflation rates begin to heat up, and virtually all economists see greater levels of inflation on the horizon. Even modest increases in inflation, combined with continued low rates, drive a bullish environment for gold.
- Overvalued Stock Market – The current level of equity prices creates a double-edged threat to investors. First, the normal cycles of correction will be even more severe for those chasing this upward swing. This is especially concerning because of the way the current market is driven by investors seeking return, not by underlying values.Secondly, the historically low bond rates eliminated them as the normal alternative to buffer against such swings. Investors have already forgotten the 50 percent loss of value in the U.S. stock market of 2008-09. Moreover, economists are pointing out today’s environment creates a higher frequency and larger magnitude of systemic risks in equities markets. Some analysts have even predicted a stock market crash.
- Demand in Asia – There is already a strong demand for gold from Asian markets, such as India. The continued expansion of economies in China, Vietnam, Thailand, and South Korea is predicted to add to it.
- New Markets – The gold market has not yet seen the full impact of the new standard for investing in gold under Sharia Law. This new factor, along with increasing use of gold-back ETFs and of gold in defined-contribution pension plans, will result in new demand equaling thousands of tons of gold–without the possibility of a commensurate increase in supply.
Of course, the factors do not address the many new sources of demand for gold in industrial, scientific, and medical applications. Taken together, it is easy to see why the World Gold Council forecasts strong demand for gold in 2017.