Gold has been in a narrow trading range for months and it may require some startling news or major shifts in attitudes and perceptions for prices to break out to the upside. While gold tends to do better when there is uncertainty in other financial markets, it is also held back because of that same uncertainty. Any one of the following three scenarios that might play out in the coming months could trigger a major gold rally.
1. Economy weakens and Fed remains on the sidelines
Nothing is ever certain until it actually happens. Most economists have been saying for months that our economy is getting stronger by the day; the Fed considers the opinions of respected economists and then decides what policy is most appropriate. However, Janet Yellen will not be intimidated into raising rates if she believes that the economy is not as strong as it should be. The Atlanta Fed recently revised its first quarter growth rates down from 1.9 percent to zero. If the numbers actually come in weaker than expected, there is a good chance that Janet Yellen will delay any interest rate increases to the latter half of 2015 or sometime into 2016. If interest rates stay down, that will be very positive for gold.
2. China reveals big increase in gold reserves
Depending on how you measure GDP (traditional or PPP), both the U.S. and China can stake claim to being the world’s largest economy. Both economic super powers have annual GDPs above $18 trillion. There may be a bit of debate as to whether China has the largest or second largest economy in the world, but there is no debate about China having the ability to move gold prices, if that is their desire. China holds gold for many reasons, but for the central bank it is all about diversifying their foreign reserves and making the yuan a more attractive world currency. China wants to be on the same level as the U.S. dollar and the euro, because being a major world reserve currency gives a country economic power and status. As China continues to westernize, its leaders want that status.
It is suspected that China may disclose gold reserves of 3,510 metric tons, about three times as much as their last disclosure back in 2009. When some more clarity about how much gold is held by the Chinese government is revealed, that could trigger an upward move for the gold market.
3. Major terrorist attack in the U.S.
The world is shocked whenever a terrorist attack takes the lives of innocent people, but if and when such an event occurs here in the United States, the reaction can be magnified. If there is an attack in a shopping mall, school, hospital, or any other place where people congregate, fear and panic will set in. It would be even worse if our water supply was poisoned or the power grid was compromised. While we hope and pray there will never be such an attack, if it does happen, investors will flee to the safety and comfort of gold.