Before jumping onto the main topic, I would like to essay out some facts about Gold prices this year. (Assuming Silver prices have more or less followed Gold prices). I am sure; lot of people would be feeling that US$60 is a big decline for Gold prices in the recent weeks and few would even have increased their bearish bets against the precious metal. I must warn them by quoting that even after the recent decline; the precious metal is nearly 16% up from its lows.
Then why there is a decline?
- The U.S. central bank surprised markets last week by cutting its rate hike projections more than expected, down from four to two in 2016, citing the potential impact from weaker global growth and financial market turmoil on the U.S. economy. This led to a rally in the U.S. dollar index and in turn bearish for the metal.
- There was a brief safe haven status which Gold gained due to the attacks in Brussels.
- Throughout the last week various Fed members including Patrick Harker, the Philadelphia Fed president, have come out in support of raising interest as soon as April – if the economic conditions were to move.
- One more reason is the Easter Holidays, where I would see the profit booking in the Gold prices is quite understandable.
Now coming to the main topic: Why Gold is undervalued according to me?
- Reducing the number of rate hikes from 4 to 2, clearly states that FED isn’t sure how the world economy would fare in the longer run. Even when US economy has been showing some positive economic numbers, they are unable to take the most obvious step and when the inflation picks up faster than the central bank expects, they would have to increase the rates quickly.
- A dovish Federal Reserve, a weaker U.S. dollar and negative real interest rates will all be positive for gold this year. Over the recent years, the most dominant driver for gold prices has been the direction of the US dollar. As we are now expecting a lower dollar over the coming years we expect it to play a crucial role in the movement of gold prices. As for the Fed the analysts say that even if the Fed does raise interest rates later this year — a scenario they see as unlikely — they will be perceived as being behind the inflation curve high will once again be a pushing factor for gold prices as investors will likely buy gold because of lower US real yields and as some may see gold as a possible inflation hedge.
- There are lot of crucial political events this year:
- Current leadership crises in Brazil
- US presidential election in November
- U.K’s June vote over its membership in European Union.
All of them would leave a lasting effect if they go against the market.
- Terror threat across Europe, Syrian conflict and other Geopolitical tensions will always make Gold has the safest investment during the turmoil.
- Moody’s Investors Service highlighted China’s surging debt burden in lowering the nation’s credit-rating outlook to negative from stable earlier this month.
- We are in a tug of war between slow growth and high valuations on one side and central bank stimulus on the other.
Looking at the renewed turmoil in financial markets by highlighting the Fed’s policy divergence with the ultra-easy stances of the ECB and Bank of Japan, the near future seems bright for gold.