What’s Up Ahead for Precious Metals in 2016?

The year is near its end and it’s clear that gold and silver, for the third year in a row, didn’t have a good year. Prices of both precious metals dropped by 9% and 8%, respectively. And while bullion prices did kick off the year on a positive note – at one point gold reached $1,300 and silver $18 – they have had a slow downward trend mostly during the last few months of the year, as indicated in the following chart.

gold and silver outlook 2016

Source: Bloomberg

In 2016, the focus will revolve around three issues that are relevant to precious metals:

  1. The direction long term interest rates: On the balance are the expected Fed hikes that should push up rates. On the other is the rising demand for U.S. LT treasuries as the global economy isn’t doing well. If yields end up rising, this could push further down PM prices;
  2. The uncertainty around global economic growth: Not only the EU isn’t doing well but also emerging markets. This includes China and Brazil. These economies’ economic woes could raise the unrest in the markets. And when people are concerned, some of them tend to invest in gold and silver;
  3. The direction of U.S. dollar: Again, the above mentioned – Fed’s policy and global economic woes — will impact the direction of the U.S. dollar. But also the steps taken by other central banks. If they keep implementing additional policy measures to devalue their local currencies – the U.S. dollar will keep appreciating. And a stronger U.S. dollar means a downward pressure on PM;
  4. Change in supply and demand: This could be the factor that will separate the direction of gold and silver. The silver market, perhaps even more than gold, is still more linked to its physical demand. And the production of silver is expected to drop – or at the very least not rise. Will this be enough to push up silver rates back up? That’s a big question that could determine whether silver will rally in 2016 or not.

Considering all these factors, I think that in the end it’s more likely that PM will experience another year of falling prices.  

Some additional thoughts

Will we see a decoupling of gold and silver in 2016? Both precious metals are strongly correlated, and will remain so. But will their trend lines move in different directions? After all back in 2014, gold remained nearly flat on a yearly scale, while silver lost 17% of its value. And back in 2011, gold rose by 10%; silver dropped by 10%. This is certainly a possibility mainly considering the last factor listed above.

Some factors that may have been considered by some as valid in the past will take the back seat such as concerns over inflation: Considering commodities prices are low, and the Fed is expected to move towards raising rates, the concern over the devaluation of the USD or a sudden spike in inflation will become even less possible and fewer people will take a position on gold to hedge against such a possibility (not that there was any high concern to begin with).

Bottom line

I won’t hold my breath to see a substantial recovery in gold and silver. Of the two, I think silver may have a better chance of a modest recovery solely on account of the expected drop in supply that could tighten the physical silver market — even though inventories are still elevated.

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