With the Federal Reserve officially exiting its asset-purchase program a couple months ago, unemployment falling under 6%, and gross domestic product below 4%, economic data signals and recent events seem to be pointing at the likelihood of a strengthening dollar and improving U.S. economy in 2015.
This news has many market watchers and analysts fairly certain that the Fed will be in an ideal position to raise interest rates during the second half of the coming year, and anticipation of that rate hike will probably place downward pressure on the price of gold during the first half of next year.
Below we'll take a look at some of the key factors that will influence the direction of gold prices in 2015, compare average price forecasts from leading analysts and institutions, and discuss the logic and rationale behind buying or selling gold in 2015 as a retirement investor.
Projected Average Gold Price for 2015
Let's start with what the experts are predicting. Most analysts expect the average price of gold to stay somewhere between $1,140-$1,225 throughout the next year, with most agreeing that prices will trend higher during the second half, after the market adjusts to the slightly higher interest rates that the Fed is expected to impose. To give you an idea of how close the general consensus is, here are a few of the projected gold price averages for 2015 from some of the leading financial analysts:
- Commerzbank: $1,200
- Citi Research: $1,220
- TD Securities: $1,225
- Natixis: $1,140
As the figures above indicate, it is likely that gold will stay under $1,300/ounce for most of the year, although we may see some short-term rallies if the demand for physical gold improves, particularly during the holiday/wedding season between September-January, which is historically when the most jewelry and other gold products are sold. Still, weaker-than-normal growth in the physical gold markets of Asia and Europe could temper the prospect of sustained or significant price increases in 2015, although a recent report from Bloomberg states that improved demand in India and China could cause the price of gold to rise steadily in each quarter until it reaches $1,280 at year's end. The same report also states that the price of gold should rise to $1,420 by the end of 2016. Keep in mind that there's always the possibility that a major world event or financial crisis could send the price of gold skyrocketing as investors turn to gold as a way to safeguard against hyperinflation and currency debasement.
Top Drivers for Gold Price Direction
According to leading analysts, the most important driving factor for the price of gold during the next year will be “the anticipated action of the Federal Reserve.” While crude oil prices, physical gold demand, and an improving U.S. economy are also factors to consider, the real issue for most investors will be the Fed's decision regarding interest rates.
Increased interest rates typically create a bearish effect on the gold market, as investors tend to look towards investments with higher yields in order to make up for the money lost in interest. As the Fed gets closer to raising interest rates, news of the upcoming rate hike will cause many investors to make decisions that could lead to a slight drop in the demand and price of gold during the first quarter of 2015.
However, after the Fed makes its move and hikes the rates, investors and advisors may be in a better position to analyse exactly how high the interest rates may go, and at that point we expect to see the price and demand go back up as the hype surrounding the rate increase settles down. In other words, there's a very good probability that the anticipation and speculation preceding the rate increase will place heavier pressure on gold prices than the actual rate increase itself, and that some of that pressure could be alleviated once investors become comfortable with the new interest rates.
According to TD Securities, other factors that could keep the price of gold relatively low during the first half of 2015 include slowed market growth in Europe and China, and a drop in crude oil prices that could decrease the effects of inflation. The demand for and price of gold typically increases when inflation worsens, as investors look to physical assets like precious metals to protect the value of their wealth when paper currencies are threatened. With inflation lessening due to a drop in oil prices, it is likely that the price of gold will drop temporarily during the first half as well.
Time to Invest Elsewhere or a Window of Opportunity?
Based on anticipated events and average price forecasts, it's safe to assume that price of gold will probably stay within the range of $1,200-$1,300 throughout most of 2015, barring any unforeseen financial crisis. This may seem like unpleasant news to investors who have watched the price of gold stagnate at around $1,300 for the past year and a half, but that depends on how you look at it.
As an investor who already owns gold, or one who is considering buying gold, there are two main ways to approach the coming rate increase from the Fed and the overall direction of gold prices in 2015:
A) The Pessimistic Short-Term Approach – Interest rates are going to increase, the demand is going to stay about the same, and the price is expected to stay about the same this year as well. Therefore, I should allocate less of my portfolio to gold and other commodities, and focus more on investments that offer a higher yield in the short-term, in order to offset the effects of the higher interest rates from the Fed. Converting some of my gold into cash before the price drops will give me more funds to invest in instruments that will perform better in a high-interest environment.
B) The Realistic Long-Term Approach – The Fed's rate increase is expected to be modest and will most likely have no long-term effect on the viability of gold as an investment and, more importantly, as a hedge against inflation. Despite the fact that the price of gold is expected to remain relatively stagnant during the coming year, it is highly probable (almost inevitable) that the price will rise again in the future, and some analysts even predict that gold could reach as high as $5,000/ounce at some point within the next decade.
In fact, two years ago an analyst with Forbes said it isn't a matter of if, but when. In light of that, it may be a better for an investor to hold onto any gold they already have, as it will continue to increase in value and may even generate a hefty return within the targeted timeframe that is considered ideal for retirement investors, and any prudent investor should also consider increasing their gold holdings during the first half of 2015, when the price is expected to be at the lowest projected point in the foreseeable future.
All projections after the first quarter of 2015 point to higher prices leading into every quarter until the end of 2015, followed by higher prices than those at the end of 2016, and so on. Buying early, at the lowest-possible price, and selling late at the highest-possible price, are fundamental investment principles.
The Gold Plating
Forget about the unseen inner workings of price direction for a moment and let's look at the gold plating on top of it all: regardless of what happens to the price of gold and interest rates in the short-term, it is an indisputable, unavoidable fact that gold is a limited resource, which means the core supply will inevitably dwindle.
As less gold becomes available for purchase in the global markets, the price will increase – there's no way around it. At the very least, mining companies will have to charge more for their services because it will take them more effort, more energy, and more time to mine the last remaining gold reserves. And we're not talking about 100 years down the line either; reputable reports indicate that the world could run out of gold just 20 years from now! Imagine how valuable gold will become after most of the world's gold reserves have been mined to exhaustion?
As a retirement investor, your top priority should be protecting the value of your wealth and allocating your portfolio towards investments that will give you an ideal return within the next 10-30 years, and that just so happens to be the timeframe in which gold is likely to reach its highest price ever.
Does that mean you should run out and convert 90% of your retirement savings into gold? Absolutely not. Experts still recommend allocating only 5%-20% of your overall retirement portfolio to precious metals. That leaves you with the rest of your well-diversified portfolio to focus on investments that present higher short-term returns and the opportunity for residual income during retirement (i.e. – bonds, stocks, CDs, mutual funds, etc.).
So what is the real, 24k gold-plating then?
Consider this: How rare and valuable do you think a 1-ounce bar of gold (or any other precious metal) might be 100 years from now, 500 years from now, 1000 years from now? Who cares, right? As a retirement investor you should only care about maximizing and protecting your retirement savings through solid investments, so how can something 100 years from now affect that?
First of all, we should strongly reiterate that based on the current rate of mining, all of the discovered gold deposits on Earth are going to be mined within the next 2 to 3 decades, not 100 years. Those are the facts. Time is the gold-plating, and eventually it will chip or fade away and reveal the true value (monetarily at least) of what lies underneath the surface; the metal we've all been trying to uncover and unearth for thousands of years and have only in the last century been able to.
Increasing Demand, Decreasing Supply = Higher Price
Long after there's no more gold to be mined on Earth, and every discoverable nugget has been brought to the surface and sold, how much do you think your $1,200 ounce will be worth? In any currency that exists at the time? If the implications haven't hit yet, then you're simply not familiar with the ever-increasing list of applications gold has across hundreds of industries, from medicine and cosmetics to space engineering and mobile phones. Gold is needed, and wanted, in every country in the world, for literally thousands of reasons.
With that in mind, gold fits the criteria of a physical asset that will only increase in demand and decrease in supply, and that arguably is the safest kind of investment to have, but not necessarily the most profitable investment, which again is why advisors recommend allocating no more than 20% of your retirement portfolio to precious metals investments under current market conditions. If the dollar were to collapse or another serious global financial crisis were to occur, then we could see advisors recommending much higher percentage allocations towards precious metals, maybe even closer to the 50%to 75% mark if currencies started to collapse, as investors would be flocking to gold and other precious metals as one of the only ways to preserve their wealth.
Let's lay out a few hypothetical scenarios here to look at the possibilities:
An investor starts with a $100,000 portfolio and allocates a relatively generous $20,000 (the commonly recommended 20%) of the portfolio to physical gold investments. The investor paid an average of $1,000/ounce for their gold. Then:
A) 7-10 years later the price reaches the aforementioned $5,000/ounce mark. That would mean that the initial $20,000 investment would then be worth $100,000, or equal to the entire value of the original portfolio just 7-10 years earlier. The investment was a huge success and proved to be lucrative, even though the investor only intended to use it as a hedge against inflation.
B) Gold never reaches $5,000/ounce. Instead, the price of gold continues to stagnate at around $1,200 before gradually rising at a modest pace. Nothing out of the ordinary happens and gold simply retains its value or stays close to it. In this scenario there wouldn't be a huge return on the investment, but the investor would still benefit because a portion (in this case 1/5th) of their portfolio held its value and therefore protected the overall portfolio from the devaluing effects of inflation.
As inflation increases, more people try to buy gold to protect their wealth, which increases the demand and drives the price up. There is a verifiable historical correlation – as inflation increases, so does the price of gold, and as long as gold holds its value, it will have served its primary purpose of protecting a portion of your wealth from inflation.
The two scenarios mentioned above are two likely outcomes on either end of the spectrum. It is extremely unlikely that gold will become less valuable as time passes. It is a limited resource that can easily be exchanged for any form of currency around the world and it is has a wide range of uses. So in a worst-case scenario gold acts as a wealth preserver and effective hedge against inflation, and in a best-case scenario it can triple, quadruple, or even quintuple its value in just a few years' time. That's not to say that the price of gold can't experience temporary price drops, as the market is constantly fluctuating, but over the long-term, gold is irreversibly set to become more valuable as time passes.