Three Factors That Could Send Gold Prices Soaring

Going forward, economic and stock market uncertainty will rise. As this happens, without a doubt, gold will do what it does best: protect wealth for investors.

Uncertainty will be mainly driven by three factors: the Federal Reserve; a struggling global economy; and investor frustration.

Federal Reserve Going Against the Grain

Right now, the trend around the world is lowering interest rates—several major ones and numerous smaller ones have done this since the beginning of the year. Others are keeping their benchmark rates the same.

When you look at the Federal Reserve, it is planning to do the complete opposite: raise interest rates. And it’s really adamant about it. Not too long ago, the Bank of England was contemplating a similar idea, but it hasn’t been very consistent on this view.

The big question around this is: will the U.S. economy be able to sustain itself once the Federal Reserve raises rates?

In the first quarter of 2015, U.S. gross domestic product (GDP) declined at an annual pace of 0.7%. Higher interest rates also dampen the economic growth rate. With the U.S. economy already declining, interest rates moving higher could cause a recession. (Source: Bureau of Economic Analysis, May 29, 2015.)

You see, over the years, the Federal Reserve has been convincing us that there’s actually economic growth in the U.S. This is one of the reasons that it’s contemplating raising rates. But when interest rates rise and the economy tumbles, this could send waves of uncertainty and cause a flight towards safety—gold.

(For more on the U.S. economy’s health, see “U.S. GDP Contracts in Q115; Economy Halfway to a Recession This Year.”)

Struggling Global Economy; China Leading the Way

No matter how one looks at it, the global economy as a whole is slowing down significantly.

Looking at the major economic hubs like China, we get an even more gruesome image of global growth than from the data currently available.

Understand this: China is the manufacturing hub of the world. It produces a significant amount of goods and ships them elsewhere in the global economy. Its exports can provide an idea about the global demand. Sadly, right now exports from the Chinese economy are in a slump.

Consider that, in the month of April, exports from China declined 6.2%, after a decline of 14.6% in March. (Source: The Wall Street Journal, May 7, 2015.)

This year, the country is expected to report a growth rate of seven percent, which is embarrassing relative to the historical averages.

(For more regarding the Chinese economy, see “China Manufacturing Slowdown: HSBC PMI 49.2 in May.”)

Then there’s the eurozone; it continues to struggle as well. Not much has really changed in the common currency region, and doesn’t really look like anything will be different anytime soon. The problems remain, if not becoming even more dire.

If the global economy continues to slow down, it may send investors scrambling to find a place to park their money. This can cause volatility...and gold in a volatile state is hands down one of the best investments to hold. It keeps value when other asset classes are destroying wealth. 

Investors’ Frustration Mounting Higher

Since the financial crisis, central banks around the world have done anything and everything to boost economic growth. Investors, as a result, have jumped into stocks and bonds, believing that growth will actually occur.

Over the years, the data have been nothing but sluggish compared to historical averages. The sad reality is that a significant number of economies still face headwinds to this day, and the unprecedented monetary policy has caused bubbles in a few asset classes. In other words, nothing has really been fixed. 

On those investors who have been buying in hopes of economic growth: won’t they be disappointed when they hear there isn’t much growth? It shouldn’t be surprising to see investors fleeing across different asset classes and making gold a safe place to be.

Gold Outlook and How to Make Money

Gold, from a fundamental point of view, is setting up for massive rewards. It certainly doesn’t look like the case when just paying attention to the price. Investors should be looking at the big picture and thinking long-term.

As it stands, investors should be paying close attention to the mining companies. They are currently struggling. But when the gold market turns, they will provide the biggest bang for your buck.

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Moe Zulfiqar, BAS, Analyst, Profit Confidential