Gold Price Forecast 2017
After falling roughly 12% in the weeks following the U.S. election, gold prices have rebounded and are at a three-month high of $1,235.00 per ounce. Investors should expect this momentum to continue as the gold price forecast for 2017 remains bullish. Gold’s seven-percent gain in 2017 will be just the beginning as investors seek safe-haven investments like gold and silver.
This bullish sentiment comes in spite of what Wall Street and even the hawkish talking heads at the U.S. Federal Reserve maintain. The gold bears maintain that gold prices will tumble because of a stronger dollar, encouraging economic data, and optimism that President Donald Trump’s economic policies will be good for corporate profits.
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In fact, if you listen to the Federal Reserve, the U.S. economy is back to normal, the labor market is healthy, and inflation is headed higher.
“Given the state of the economy, more or less back to normal, I continue to see three modest rate hikes of 25 basis points each as appropriate for 2017, assuming things stay on track,” said Philadelphia Fed President Patrick Harker. (Source: “US economy looking good, Fed poised to hike rates: Harker,” CNBC, February 21, 2017.)
This, of course, would be bad news for the gold price outlook in 2017 since gold is highly sensitive to rising U.S. interest rates. Rising interest rates undercut the demand for non-interest bearing assets like gold and silver. Rising interest rates will also, in theory, boost the U.S. dollar.
But this Pollyanna view of the U.S. economy overlooks, or completely ignores, the real issues facing Americans. The bearish outlook for gold and silver prices in 2017 also ignores what’s going on outside of our borders. With so much uncertainty about Donald Trump’s economic platform and trade policies, less-than-stellar economic data, and geopolitical issues, gold could easily make a run for pre-election levels near $1,345.00 per ounce and silver prices could rise to multi-year highs near $25.00 per ounce in 2017.
Gold Prices Steady as Fed Chair Dovish on Economy
While some members of the Federal Reserve are bullish on the U.S. economy, not everyone is willing to jump in with rate hikes. Gold prices have actually been holding steady, and gained support from the Fed minutes of January 31 to February 1.
The minutes showed growing uncertainty around President Trump’s economic policy. This, of course, has many thinking that the Fed will not raise rates when it meets again on March 15. News of the lukewarm response to Trump’s policies put the brakes on the U.S. dollar and bond yields. (Source: “Minutes of the Federal Open Market Committee January 31–February 1, 2017,” Board of Governors of the Federal Reserve System, February 22, 2017.)
Though, of course, a rate hike is never out of the question. Some believe that the Fed should raise rates in light of recent jobs data and inflation. Jobs numbers are, on the surface, solid, and the consumer price index inflation indicator is at its highest level in years.
Again, that so-called strong data does not mean the U.S. economy is strong and could withstand a rate hike.
In January, the U.S. economy added 227,000 jobs, the best monthly gain since September. That said, the unemployment rate increased slightly to 4.8%. For the first time in a long time, the growth came from full-time jobs, not part-time. While this is encouraging, wage growth is a problem. On the other hand, underemployment is climbing back up to near 10%. (Source: “Economic Situation Summary,” Bureau of Labor Statistics, February 3, 2017.)
U.S. wages were revised down to 2.5% from estimates of 2.7%. This is also a slowdown from 2.8% in December. Slower wage growth might be good for corporate America, but it’s not good for consumers who support the U.S. economy. If they don’t make enough, they won’t spend.
As for the Consumer Price Index Summary, the cost of living increased by 0.6% on a seasonally adjusted basis. That’s the most since February 2013. On a year-over-year basis, the cost of goods and services increased by 2.5%. (Source: “Consumer Price Index Summary,” Bureau of Labor Statistics, February 15, 2017.)
Good news if you happen to be the president at the Federal Reserve. Consumer price index (CPI) and retail sales data was solid, but wage growth is anemic. Monthly hourly wages were down 0.6% in January. On a year-over-year basis, hourly earnings growth was non-existent, adjusting for inflation. It’s also an about face from the 0.8% earnings growth in December.
January jobs data was decent, but overall, employment growth during the economic recovery has come predominantly from low-paying, part-time jobs. Americans are making less money, and getting more and more into debt simply to tread water. The only thing that raising rates prematurely will do is hurt the U.S. economy and corporate profits. And send safe-haven investors into the arms of precious metals like gold and silver.
U.S. Stock Valuations in Nosebleed Territory
Nothing can send knee-jerk investors back to gold and silver like stock market instability. It doesn’t even need to be a stock market crash; a small correction is enough to send gold and silver prices soaring in 2017. Case in point: gold and silver prices soared and stocks tumbled in early 2016 after the Fed prematurely raised its overnight lending rate and fears of a global recession resurfaced.
The same elements are at play again. The global economy remains weak. The Fed will raise rates again in 2017. How many times is the big question. U.S. stocks are at record levels, but the U.S. just exited the longest earnings recession in history. It might be 2017, but earnings for S&P 500 companies is at 2011 levels. Yet strangely, the S&P 500 has advanced 87% since then. That tells us one thing: stocks are significantly overvalued. And ripe for a major correction or even stock market crash.
CAPE Ratio
According to the cyclically adjusted price-to-earnings (CAPE) ratio, the S&P 500 is overvalued by 83%. The ratio is currently at 29.23; the long-term average is 16. It has only been higher for longer twice, in 1929 and 1999. In 1929 it was at 30; in 1999 it was at a sky-high 45. With all the euphoria on Wall Street, it’s just a matter of days until the S&P tops the 1929 Black Tuesday valuation. (Source: “Online Data Robert Shiller,” Yale University, last accessed February 23, 2017.)
Market Cap to GDP ratio
The market cap to GDP ratio, also referred to as the “Warren Buffett Indicator,” suggests that stocks are significantly overvalued. The market cap to GDP ratio is at 131%. A reading of 100 suggests that stocks are fairly valued. The higher the reading over 100%, the more overvalued stocks are. The Warren Buffett indicator has only been higher once since 1950. It was at 153.6% in 1999. It was only at 108% before stocks crashed in 2008.
Wilshire 5000 to GDP Ratio
The Wilshire 5000 to GDP ratio is less well known than the other two, but it’s the largest index by market value in the world. The ratio is at an all-time high of around 140.5. (Source: “Wilshire 5000 Total Market Full Cap Index/Gross Domestic Product,” Federal Reserve Bank of St. Louis, last accessed February 23, 2017.)
Some investors may not pay attention to a perma-bear like Nobel Prize-winning economist Robert Shiller, but there aren’t a lot of investors who don’t care what Warren Buffett thinks. And the St. Louis Fed is a pretty reliable source of information.
All three say that the stock market is significantly overvalued. History and time are on the side of a major stock market correction or crash in 2017. This bodes well for gold and silver prices in 2017.
Donald Trump’s Tax Cuts and Spending
Investors are hyped up on Donald Trump’s economic action plan. The White House has called his yet-to-be-unveiled tax plan “phenomenal” and the “most ambitious tax reform plan since the Reagan era.” But, other than that, it’s a crap shoot. As a result, there’s more than a little uncertainty about how his tax cuts and infrastructure spending will impact the U.S. economy.
After all, tax cuts combined with increased spending cannot help but translate into higher debt. When Trump took over the White House, the national debt stood at over $19.0 trillion, the deficit was at $559.0 billion, and debt held by the public was at $14.0 trillion.
Just on the current course, it’s expected that by 2027, the U.S. gross debt will soar to $30.0 trillion and public debt will almost double to $25.0 trillion. (Source: “The Budget and Economic Outlook: 2017-2027,” Congressional Budget Office, January 24, 2017.)
Without long-term, sustained economic growth to cover the costs of his economic policies, the tax cuts and spending will just mean more debt that will never get paid off.
In addition to debt that will never get paid off, there is mounting concern that Trump’s “America First” platform could lead to an all-out trade war with China, Mexico, and anyone else that Trump sees as a threat.
Trump has threatened tariffs as high as 35% on goods coming into the United States. Most economists believe that a tariff of this nature imposed on China would have serious consequences for the U.S. economy. It would be tough not to expect China and Mexico, etc. to retaliate with their own tariffs.
This too would cobble U.S. profits, send stocks plunging, and investors running to seek shelter with gold and silver.
Brexit, Frexit, and North Korea
Outside of our borders, there is more than enough geopolitical fear to stoke silver and gold prices in 2017. The U.K. will begin the process of leaving the European Union (EU) by the end of March. The British economy performed better than expected in 2016, but it’s a new year. Cracks are starting to show in Britain’s economic reliance since the June Brexit vote.
The U.K. economy is slowing down. Where the U.K. used to be the fastest growing economy in the G7, that is no longer the case. That title now goes to Germany. The German economy grew by 1.9% in 2016 while the U.K. economy advanced by 1.8%.
Moreover, costs are rising, wage growth has slowed, and the weak pound is pushing up inflation. Just like in the U.S., questions are arising as to how much longer the British consumer can shore up the U.K economy.
Upcoming Dutch, French, and German elections could also cause turmoil on the global markets and make gold and silver more attractive.
All eyes are on the first round of France’s presidential election on April 23 (the second round is on May 7). French presidential candidate Marine Le Pen’s popularity is rising. The right-wing politician is running on a platform of national sovereignty and independence, and has pledged a “Frexit” vote should she win the national elections in 2017. No country has left the euro since it was created in 1999. But that doesn’t mean it can’t happen.
If a major economy like France were to ditch the EU, economists believe that the markets would plunge, countries would take control of money transfers, banks and countries would default, and lawyers would get away with murder, filing lawsuits on bonds and contracts.
Le Pen is leading the polls for the first round of voting, but many believe she will lose in the second round on May 7. Keep in mind, the number-crunchers didn’t think the Brexit vote would succeed. Nor did they predict that Donald Trump would win the U.S. election.
Germany is facing a Federal Election this fall, and German Chancellor Angela Merkel’s popularity is declining fast. The outcome of the October 22 election is increasingly uncertain thanks to the emergence of Social Democratic Party leader Martin Schulz and the right-wing Alternative for Deutschland party.
Lest we forget the geopolitical tension coming out of North Korea, between the U.S. and Russia, and U.S. and China.
North Korea continues to test intercontinental ballistic missiles. And the apparent assassination of Kim Jong Nam, the half-brother of North Korea’s leader, could lead to all-out war in Asia.
In the midst of all of this, investors shrug everything off and send stocks higher. It won’t take much to make investors nervous in 2017 and for the gold price prediction and silver price forecast to change direction fast.
Whether it’s a premature rate hike, weak economic data, unforeseen hurdles with President Trump’s economic policies, geopolitical tensions, a major stock market correction, or even a stock market crash, the gold and silver price outlook remains bright.
It would certainly not be out of the question for investors to see gold price go to pre-election levels near $1,345.00 per ounce and for silver to top $25.00 per ounce in 2017.
