9 Real-World Risks for Gold From September to the End of 2016

September 12, 2016 by Jon C. Ogg

The gold trade came on strong in 2016. Even if it looks like an easy buck in retrospect, the reality is that most analysts, economists and chart watchers were actually looking for gold’s upside to be muted in 2016 — and many thought it was going back down closer to $900 per ounce. After more Federal Reserve presidents are pushing for higher U.S. interest rates, several things may be of concern to gold investors for the rest of 2016.

24/7 Wall St. has pulled together nine key risks for gold specific to the end of 2016. Some of these may seem obvious, but investors and market watchers alike often get honed in on just a few key issues from time to time. A larger market share again is held by exchange traded funds (ETFs) tracking gold, and not just in gold-themed exchange traded products tracking the actual price of gold. The Federal Reserve and other central banks matter handily, as do issues like currencies, the chart, interest rates and more.

Here is a detailed sketch of each major point that gold bugs and gold haters alike need to consider for the rest of 2016.

Federal Reserve Rate Hikes

The first issue is of course the Federal Reserve. We do not yet know if the Fed will raise interest rates in September. Either way, more Fed presidents are talking up the need for higher rates. If the market feels a series of rate hikes will be heading this way, then gold’s ability to compete with bank deposit and short-term rates will be pressured. If the market believes that the Fed wants to get close to a 2% fed funds rate sooner rather than later, then “real deposits” are likely to be more valuable than alternative forms of deposits.

Demand Trends for Investors

ETFs held 2,297.3 tonnes of gold at the end of August, up 27.0 tonnes from the prior month, but the asset value of $96.7 billion was 1% lower from the end of July. Investors in ETFs have been a huge bright spot for 2016 demand, but investors don’t like piling more money into lower and lower prices. All in all, there was a mixed flow of funds in actual gold ETFs. If that continues, look out.

Demand Trends From Central Banks

The World Gold Council has shown that some central banks have been buyers of gold. Many need to be buying more gold, but needing to and “doing” are different in the real world. Russia has been buying gold from domestic production, and some nations have been selling gold to raise cash. What if central bankers said that they were taking advantage of high gold prices to generate cash, or if the central bank sales of gold were to pick up? This might panic investors. What if China decides not to return to gold buying even though it needs to add gold? That might also be a worry. As a reminder, just 20 nations hold 88% of the world’s gold reserves. Venezuela is in trouble and needs cash, via gold sales.

Is Brexit Still an Issue?

Most people did not even know that Britain was in the European Union because it had its own currency (the pound). Most people didn’t even think that Britain was a threat to the euro. Well, then came the Brexit vote, and everyone panicked. But then the markets rallied handily off the post-Brexit lows. It turns out that the World Gold Council pointed to the United Kingdom continuing to be a source of growth in gold ETF demand. What if those U.K. investors decide the damage already has been done and that the uncertainty was more media hype than real economic derailment?

What If Gold Miners Can’t Keep Up?

If you trust the SPDR Gold Shares (NYSEMKT: GLD) as the top gold ETF , gold is up almost 25% so far in 2016. On the other hand, the gold-mining stocks have seen even the index leaders double. And the junior gold stocks, with lower market caps, have seen gains of over 200% so far in 2016 in some cases. The VanEck Vectors Gold Miners ETF (NYSEMKT: GDX) is up 92% so far in 2016 and that is the largest miner. Then there is the so-called junior gold-mining sector of stocks, and the VanEck Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ) was last seen up 131% so far in 2016. Let’s just say that this is pricing in a major boost to earnings for gold miners and higher prices. What if that does not come about? Credit Suisse was cautious on three-quarters of its gold stock universe even in August.

The Mighty Dollar

It has been about 18 months or so that major companies have had to deal with a much stronger U.S. dollar. That theme was much more prevalent in 2016, but the next directional move could really impact the price of gold. There is generally an inverse relationship between the dollar and the price of gold: a falling dollar means other currencies went up and increased the demand for gold and other commodities. This does not have to hold true, but it is a general theme sort of like stocks being inversely related to bonds.

The November Election

Another issue is the 2016 presidential election. 24/7 Wall St. isn’t going to bother picking a winner or loser, and frankly half of the readers would upset about either candidate. Some reviews have tried to show whether Donald Trump or Hillary Clinton would be better or worse for different asset classes, but for now either outcome is an uncertainty. Perhaps the real issue is over the balance of the House and Senate this year.

Geopolitical Risks

Getting in the middle of terrorism is something that the financial markets have a very mixed measurement of. Either way, gold is considered a safety trade on a global basis. The headlines have been more muted in recent weeks, but everyone knows we can be an hour away from catastrophic news about terrorism, military action, accidents, embargos and more that only creates more uncertainty.

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The Darned Gold Chart

Market technicians generally do not get too hot and bothered about the real world news. They rely on the notion that the charts tell you what is happening, and what that means for prices tomorrow. Now the price of gold is lower than the peaks seen in July and August, with the early September recovery looking more like a third set of “lower highs” from this summer. Charts can change on a dime, but right now the gold charts have to be considered an uncertainty. Still, at least for the time being, there does not appear to be any “death cross” or other major pattern signaling a crash or elation-fueled rally is imminent.