posted on 18 January 2017
by Peter Krauth, Money Morning
Special Report from Money Morning
I'll be blunt: This is the perfect time to lay into ample supplies of gold and silver. I think that, here at the start of 2017, we're on the cusp of a good strong bull run for both metals.
After a frustrating second half of 2016, I see several undeniable reasons why demand will tighten up and prices for both of these popular investments will begin to surge.
I'm going to show where I think gold and silver will go in the short term and give you four reasons why I think precious metals investors could have an even better year than they think.
I believe we've seen the bottom, and the future prospects look bright, so let's take a look at my price forecast.
Metal Bears Are Running Out of Excuses
This hasn't always happened in the past, but the price of gold in 2016 suffered as a direct result of the market's reaction to a hike in the fed funds rate. For instance, in just the two hours following the Fed's Dec. 14 decision, gold plunged $19.
You can put this down largely to a lack of surprise at the Fed's decision. Remember, rate hike certainty was running at greater than 90% this December. Compare that to the previous rate hike, in December 2015, when the markets pegged the odds of that rate hike at just 50%.
So it's simple: When the markets are surprised, they run for gold, thanks to its legendary status as a hedge.
The silver picture is similar. Its slide started in the summer of 2016 after hitting a yearly high of $20.59. Skittish traders sold and sold some more, fearing it would go lower in a kind of self-fulfilling prophecy.
Trump's unexpected victory in the November election didn't do silver and gold any favors. The U.S. Dollar Index's (DXY) meteoric rise since November has created some short-term resistance for the white metal, since, like gold, it directly competes with the dollar.
But like I said, the odds are very strong that we've seen the bottom of this metal correction.
Indeed, we've already seen a steep pullback in "smart money" shorts, in other words, gold and silver producers who bet on futures to protect their downside. Since July, gold producers alone have pruned their short positions from 340,000 back to 155,000, as of Dec. 5. That drop of 54% in just six months indicates bearish metals sentiment is running on fumes.
And now the stage is set for both gold and silver to move considerably higher in the new year.
Gold & Silver Catalyst No. 1: The "Surprise" Metal Demand No One Predicted
There's an interesting element to the demand picture, one that's not being talked about. It is, of course, India.
The world's largest democracy is a huge consumer of precious metals for all sorts of cultural and economic reasons. And it turns out that India had a surprise of its own on Nov. 8.
That was the day Prime Minister Narendra Modi's government essentially demonetized two of the most popular, widely circulated denominations of the rupee, the Rs500 and Rs1000 notes, as part of an all-out blitz on India's so-called "black money," counterfeiting, and ill-gotten gains from corruption.
The news sent the country into a confused frenzy that's only recently died down, with long, rambunctious lines at ATMs and banks.
I think the situation in India will be a huge source of "surprise" demand for gold and even silver well into 2017, as Indians expand their voracious appetite for gold and begin to buy up silver.
Indeed, silver imports to India have been rising right alongside gold for the past few years. And now rumors abound that the Indian government will restrict the amount of gold individuals can own, which will only push the metal-buying public - hundreds and hundreds of millions of people - into silver, as well.
Most of the catalysts I see are shaping up much, much closer to home, though.
Gold & Silver Catalyst No. 2: The Strong, Expensive Dollar - for Now
It seems counterintuitive to consider an appreciating dollar as a profit catalyst for precious metals. After all, as I mentioned, the dollar's strength has contributed to gold and silver's decline recently.
But… there have been many periods where the complete opposite has happened.
In the 1970s, for example, the Federal Reserve set rates soaring to levels unthinkable by Janet Yellen's standards. They routinely topped 5% over the course of the decade, hitting 13% during Arthur Burns' tenure in 1974 and 15.55% in 1979 during Paul Volcker's day. All this was done in a less-than-totally-successful attempt to shore up the dollar and crush the inflation and high unemployment that vexed the Fed throughout the decade.
And yet, through all of this, gold enjoyed a kind of "Golden Age," with gold starting the 1980s around 24 times more valuable, per ounce, than it had been in 1970. And the run continued through the 1980s. That was a bull market of epic proportions - the mother of and benchmark for all secular metals bulls.
Certainly in 2017, I don't expect a strong dollar to do any harm to the price of gold. That said, I don't think the dollar will stay all that strong for much longer. Which brings me to the next catalyst.
Gold & Silver Catalyst No. 3: Rising Inflation (and a Weaker Dollar) in the Future
Higher bond yields, the incoming Administration's spending plans, and a heating-up economy all signal higher inflation. Right now, the fed funds rate is 0.5%, while inflation is running at 1.7%. That means the the real interest rate is -1.2%. And, as we've seen, when inflation outpaces interest rates, gold does better, largely because it's seen as a hedge against inflation and an alternative to the dollar.
How to do we know higher inflation is coming? It's being telegraphed.
Trump has announced his desire to weaken the dollar to boost exports by making U.S. goods cheaper. His proposed trillion-dollar spend on infrastructure, largely paid for by tax cuts and debt, will also put the brakes on the dollar. It should spur economic growth and inflation.
Once inflation reaches a "tipping point" in the mind of the public, who perceive that we're in an inflationary cycle and run out and pile into gold as a hedge - another self-fulfilling prophecy. I'm anticipating this will be a strong factor in about six months' time, as we get into the summer of 2017.
Gold & Silver Catalyst No. 4: Rising Industrial Demand for Metals
Both gold and silver are a good store of value, but they're also used more and more, in heavier and heavier amounts, by industry, especially high-tech and medical applications, everything from dentistry to computers, GPS receivers, solar panels, batteries, semiconductors, and even nuclear reactors all use silver, gold, or some combination of the two.
There is growth right now virtually across the board in these industries - strong growth - that's only going to get stronger in the new year. I can't imagine demand would slacken under these circumstances.
All this bodes very well for gold and silver investors in 2017, so let's take a look at how high I believe these metals can go in the short term.
Fair warning: I'm extremely bullish.
My 2017 Gold and Silver Price Targets
For all these reasons, I think we have every reason to believe we've seen the bottom of the past six months' correction, and that gold and silver are likely to turn right around and go on a bit of a tear in the just the first quarter of the year.
The yellow metal is sitting just below $1,190 per ounce right now, with support at $1,172. It's looking actively bullish right now, which serves as further evidence that the bottom is behind us. I think we could see gold hit between $1,250 and $1,280 in the first quarter, and it's not unreasonable to expect $1,400 farther into 2017.
So gold looks good, but silver looks even better. Those "smart money" shorts had decreased some 31% between August and December of last year, a bullish sign.
The current gold/silver ratio is trending down; it sits at just above 71, meaning it takes 71 ounces of silver to equal the value of an ounce of gold. This makes silver rather inexpensive relative to gold. I'm expecting silver to reach the $19 range in the first quarter of 2017, and $22 in the second. The price may even move to $24 if the Indian demand picture proves as strong in reality as it appears to be.
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