gold bars and financial investment graph

As investors continue the task of rebalancing their portfolios for 2018, many wonder whether they should increase their physical holdings of gold and other precious metals. A dive into the gold price forecast will reveal that there are a lot of reasons to be bullish on the yellow metal. Some analysts project that gold prices won’t fall below $1,200 per ounce this year, but this is likely a conservative estimate as they’ve remained above $1,300 since January 1.[1] Other experts predict prices as high as $1,600 by year’s end.[2]

These projections will come as no surprise to long-term gold investors. Since 2000, the price of gold has beat the S&P 500.[3] Those who chose gold over an S&P 500 index fund would have made more than twice as much on their investment this century. While it’s clear the yellow metal has enjoyed bullish conditions in recent years, is gold a good investment in 2018?

1. Uncertain Times Call for Safe Havens

Last year was one of rising geopolitical tensions: fiery threats and missile tests fueled fears of nuclear war with North Korea, pushing gold prices higher. Although North Korea tensions have seemed to cool, there is little reason to believe that 2018 will be any different, especially as tensions continue to rise with Russia and Iran.

While policymakers say that the Federal Reserve is likely to raise interest rates this year, many analysts are skeptical, leading them to a bullish position on gold prices.[4] Last year’s relatively flat 1.5 percent core inflation rate makes it less likely that interest rates will experience a significant increase.[5] Continued low borrowing rates contribute to the skyrocketing national debt.[6]

Many are also looking at gold as a hedge against soaring stock market prices. When the stock market bubble bursts, investors will flee to safe haven assets, such as gold and other precious metals. Moreover, if the economy contracts and a recession occurs, as many market participants are predicting, gold demand and prices could soar.[7]

2. Deficit Spending and the National Debt

Historically, we’ve had an easier time cutting taxes than reducing government spending. While the tax plan is optimistic, there are a number of factors in it that could lead to deficit spending and increased national debt. Frequent natural disasters that range from wildfires to unprecedented snow storms to massive hurricanes will doubtless add to spending, as well. Trump’s infrastructure bill could also be costly. Add to this the increasing cost of servicing the country’s massive national debt—currently $20.5 trillion—and Americans have much to be worried about in the coming years.[8]

Concern about increasing debt is also likely to drive gold prices higher. Generally, debt and the price of gold have a positive correlation.[9] As more debt is created, the value of currencies are driven down. This, in turn, pushes gold prices higher.

3. Fears of a Weak Dollar

With the Fed unwilling to raise interest rates too quickly, dollar strength is undercut. While the goal has been to allow the U.S. economy to grow as quickly as possible, many worry that the Fed is running out of fuel to keep the momentum going.

Long-term study reveals that the strength of the greenback is cyclical. A look at the historic peaks and valleys indicates that a dollar crash isn’t far off. Investors looking for a safe haven turn, time after time, to gold.

4. Bank and Fiat Currency Failures

In 2017, eight US banks failed.[10] This is up from 2016’s five bank failures. Bank failures can trigger large FDIC losses and foster distrust among the public in the banking system.

Last year also saw Bitcoin skyrocket to nearly $20,000, only to fall by 35 percent two weeks later—not the first Bitcoin crash and certainly far from the last. Interest in Bitcoin was partially driven by mistrust of banks and traditional currency, but the cryptocurrency’s volatility has scared many investors back toward traditional hedges like gold.[11] Massive swings in value aren’t the only reason Bitcoin isn’t a good investment, either. Bitcoin and other digital currencies have been subject to hacking and theft over the years.[12]

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As a precious metal, gold continues to have value even when fiat and cryptocurrencies fail.

5. Increasing Central Bank Gold Holdings

Central banks in a number of key countries have been adding to their gold reserves.[13] Between 2000 and 2016, Russia increased its gold reserves by 320 percent. China, during the same span of time, increased its by 366 percent. As of the third quarter of 2017, central banks across the world collectively bought 111 tons of gold; this was 25 percent more than during the same timeframe in 2016. Russia, Turkey, and Kazakhstan were the top three purchasers of the precious metal.[14]

Since gold is a finite resource, an increase anywhere can mean reduced inventory everywhere. Dwindling supply can drive gold prices higher.

6.  Interest Rates Going Too High or Too Low

Interest rates saw three small hikes in 2017; people who watch the markets expect that there will be at least three more in 2018. However, recent statements from the Fed indicate that inflation has remained persistently and surprisingly low, which could prevent more aggressive hikes in the coming months.[15] Gold is more attractive to investors when the rates of return on holding savings and paper assets are low. However, even after the Fed rate hike last December, gold has continued to outperform other all other investments, including Bitcoin.[16]

Conversely, if the Fed raises rates and tightens its monetary policy too quickly, it could send the economy into a tailspin and possibly cause the next recession.[17] Former Fed Chairman Ben Bernanke once said that gold prices reflect an economy’s health: when the economy is struggling, gold prices increase.[18]

7. The Tension of Supply and Demand

A number of factors will influence gold supply and demand in the coming year.

Gold Demand

Goldman Sachs observes that demand for gold in emerging markets does best when incomes are increasing and individuals have more money to spend on jewelry and investments. Demand is predicted to grow in both India and China due to their improving economies. China, which is the world’s largest gold market, has an economy that has defied expectations and continues to grow. The Indian economy is currently recovering from 2016’s demonetization and adjusting to the Goods and Services Tax that came out in 2017.[19]

By contrast, those in developed nations are most likely to buy gold as a safe haven during times of stress. With continuing pressures on the U.S. economy, paired with weather concerns and international strife, many Americans are preparing for potential downturns.

Gold Supply

All of these factors together mean that gold is at its highest price since 2013. Limits of supply in the face of this high demand will mean that gold prices will rise. Gold will be scarcer as explorers continue to cut their exploration budgets. It is likely that fewer and fewer large deposits will be discovered over time. When a deposit is found, the time between initial discovery and the first day of production is longer than ever. These factors are leading some to wonder if we have finally reached “peak gold.”

Buy Now Gold Before Prices Jump

There are many reasons to expect gold prices to continue to rise as the year goes on. Savvy investors who purchase at today’s prices are more likely to see bigger value increases in their investment throughout the year and into the future.

Whether investors buy gold as a safe haven or a tool for growth, it’s likely they’ll realize their goals by purchasing before prices rise again.

Additional Sources  
[1] https://www.fxstreet.com/analysis/gold-price-forecast-2018-cautiously-bullish-1200-is-the-line-in-the-sand-201712220821
[2] https://seekingalpha.com/article/4134242-gold-2017-expect-2018
[3] https://www.silverdoctors.com/gold/gold-news/these-10-charts-show-why-buying-gold-in-2018-is-something-most-investors-need-to-do/
[4] http://www.kitco.com/news/2017-11-08/2018-Will-Be-A-Good-Year-For-Gold-Prices-Analysts.html?sitetype=fullsite
[5] https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
[6] https://seekingalpha.com/article/4124475-recession-coming
[7] http://www.businessinsider.com/4-charts-that-show-why-a-recession-could-be-coming-soon-2017-12
[8] http://theweek.com/articles/747998/national-debt-explained
[9] https://seekingalpha.com/article/4133988-good-time-buy-gold-now
[10] http://www.fdic.gov/bank/historical/bank/
[11] https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=f184569d-3ba3-48ff-ae7b-22ac33a2c1a1
[12] http://fortune.com/2018/01/26/bitcoin-price-coincheck-nem-mt-gox/
[13] https://www.bullionvault.com/gold-news/infographics/worlds-central-bank-gold-reserves-interactive-map
[14] https://www.gold.org/research/gold-demand-trends/gold-demand-trends-q3-2017/central-banks
[15] http://www.businessinsider.com/fed-worried-about-low-inflation-suggests-rate-hikes-in-question-2017-11
[16] https://www.bloomberg.com/news/articles/2018-01-09/gold-has-a-lesson-for-stocks-and-bitcoin-after-fed-rate-increase?cmpid=BBD011018_MKT&utm_medium=email&utm_source=newsletter&utm_ter
[17] http://www.businessinsider.com/4-charts-that-show-why-a-recession-could-be-coming-soon-2017-12
[18] https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf
[19] https://www.thestreet.com/story/14421144/1/gold-price-outlook-2018.html