This year, 2016, was not the best in terms of politics and economics for many people. The year was marked by instability. Britain decided to withdraw from the European Union, the war in Syria escalated and the U.S. elected Donald Trump, which marks a new era in American financial policy. In this environment, the upcoming year is seen by investors as both a source of hope for change, and dread of things getting worse.
Now the ultimate question is where to invest next year. A surprising candidate has emerged: gold. For the first half of this year, gold prices skyrocketed thanks to tumbling currency values. Price of gold, in fact, reached new heights in the post-recession era. Brexit caused a number of Britons to favor gold investments in place of sterling pound stock. All in all, it seems that gold will continue to be a hot asset for those investing in precious metals in 2017. Here are several reasons why that may be:
1. Gold will remain a “Fear Asset”
Much of the price hikes for gold in 2017 were caused by what some investors call gold’s ability to be a “fear asset.” Political instability, among other reasons, led many investors to fear another recession, or at least a major overhaul of existing financial norms. When investors aren’t confident about the price of the currency, gold value goes up. While there’s no indication that gold prices might dramatically rise in 2017, investors can expect the current prices to fluctuate only mildly. Most of the political fears that drove the price of gold up will continue onto 2017. Brexit is still a problem for Britain, which has not even figured out how to start the exit process. In the U.S., no one knows how Trump’s economic policies will go, especially given to the President Elect’s unpredictability. The war in Middle East shows no signs of abating. Given all these reasons, gold is not going to lose its appeal as the ultimate fear asset.
2. Rising Global Jewelry Demand
Not many people realize it right away, but gold still has great commercial value for its use in jewelry. About half of annual gold demand is driven by the global jewelry industry, according to the World Gold Council. In the past two years, jewelry demand saw a surprising decline, perhaps as a result of the global recession. However, the demand is rising again, mainly driven by the jewelry-buying powerhouses China and India. Several factors in these countries are expected to drive gold jewelry buying sprees. In India, the government has created a cash crisis where people can no longer hold assets at home in large denomination currency bills. This will prompt Indians to buy gold jewelry, the traditional savings asset for most families. In China, consumer confidence is eroding and the government is also looking towards gold to prevent capital flight into foreign countries. It can be expected that these factors will lead to significantly higher demand for gold jewelry.
3. Rising U.S. Inflation
Inflation is expected to rise in the U.S. in the coming decade, which will weaken the power of the dollar, which in turn will strengthen the value of gold. Financial experts predict that because of Social Security, Medicare and Medicaid spending – in times of an uncertain job market – will increase the federal debt in the coming years. President Elect Trump has also vowed to cut taxes, which will certainly contribute to higher debt and inflation. If the U.S. does not actively take measures to contain inflation of the currency, gold will win.
Overall, gold should certainly be an asset all investors must consider in the coming year.