After hitting its high of $2,197.50 on June 6, the gold price fell 6.8% to its four-month low of $1,209.70 on July 7. Now the price of gold is rebounding this week, as it’s up 1% in the last three sessions to $1,222 today (Wednesday, July 12).
3 Catalysts for Gold Prices in 2017
And we believe the gold price will make double-digit gains through the rest of 2017.
Money Morning Resource Specialist Peter Krauth predicts the price of goldwill rebound another 14.6% from the current $1,222 level to $1,400 by the end of 2017.
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But not everyone is optimistic.
Analysts are warning that the hawkish rate talks around the world – combined with the gold price trading near four-month lows – may be evidence for even lower gold prices in 2017…
On Monday, Naeem Aslam, chief market analyst for global brokerage ThinkMarkets, told MarketWatch the hawkishness among global banks could drag gold below $1,200 per ounce.
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But Peter – a 20-year veteran of the gold and silver markets – understands one crucial aspect of the relationship between interest rates and gold prices.
It’s something that the above analyst has overlooked.
It has to do with the interest rate’s long-term effect on gold prices, and it can be summarized in one chart.
We’ll show you that chart in a second, but first, this is why higher interest rates tend to hurt gold prices in the short term…
Why Interest Rates Matter for Gold Prices
The biggest reason why the price of gold is down 6.8% from its June 6 high is increased rate hike expectations from both the European Central Bank (ECB) and the U.S. Federal Reserve. This is bearish for gold prices because rate hikes reflect improving economic health, which makes gold – an investment used as a hedge against economic downturns – less attractive.
And on June 27, ECB President Mario Draghi said rising Eurozone inflation might justify a stop to the ECB’s bond-buying program and a start to rate increases from their current 0% level. After all, Eurozone inflation in June rose 1.3% year over year and beat expectations of 1.2%, showing how Europe’s economic health is improving.
And the Fed raised the federal funds rate – the benchmark U.S. interest rate – from 0.75%-1% to 1%-1.25% on June 14, which dragged gold prices 2.3% lower over the following three sessions alone. The Fed has said it will only raise rates if the economy is strong enough.
Fed Chair Janet Yellen is also discussing her rate policy outlook before Congress today and tomorrow (Thursday, July 13). She’s expected to maintain the same hawkish tone set after last month’s rate hike – the second of 2017 – and hint at a third interest rate hike before the end of the year.
While interest rates are heading higher, so is the price of gold.
In fact, this chart shows exactly why higher interest rates will boost gold prices this year…
This One Chart Supports Our 2017 Gold Price Prediction
Peter observes that Fed rate hike campaigns – such as the current one that started in December 2015 – boost gold over the long term.
If you want proof of that, all you need to do is look at this chart from the 1970s…
“In the 1970s, the Federal Reserve set rates soaring to levels unthinkable by Janet Yellen’s standards,” Peter told readers. “And yet, through all of this, gold enjoyed a kind of ‘Golden Age.'”
As the chart shows, the federal funds rate was above 5% for most of the decade and even peaked near 15% in 1979. Meanwhile, the price of gold roared roughly 1,335% higher, from about $34.83 per ounce in January 1970 to over $500 by January 1980.
This clearly illustrates how both interest rates and gold prices can rise in tandem with each other over the long term. And if we look back to December 2015, when interest rates were raised for the first time since 2006, we can see how this long-term trend is reemerging…
Since the Dec. 16, 2015, rate hike, the gold price is up 13.5% from $1,076.80 to $1,222 today. Interest rates have since increased on December 2016, March 2017, and June 2017. They currently sit in the 1%-1.25% range.
That 13.5% gold price growth shows how gold is poised to rebound this year, especially if the Fed raises rates for the third time in 2017. The Fed’s current rate hike campaign supports Peter’s gold price forecast, which predicts the metal rebounding 14.6% from its current four-month low to $1,400 by the end of Q4 2017.
The Bottom Line: Gold prices have tumbled 6.8% since early June to their lowest level in four months due to increased hawkish sentiment from the ECB and Federal Reserve. The high likelihood of more interest rate hikes this year indicates economies are becoming healthier, which lowers the demand of gold – an investment typically used to hedge against economic downturns. But this is just a short-term decline for the gold price. As you can see from the 1970s, rate hike campaigns like the one we’re currently in have historically sent long-term gold prices soaring. This supports Peter’s prediction that gold will rebound 14.6% to $1,400 this year.
Up Next: A completely unique gold play is forming in the markets. And it’s so rare that it’s only the third time in 20 years that it’s happened. If you get in now, you could see a share of upwards of $13 billion in cash windfalls. Read more.
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