Price of Silver and Gold in 2017: Why They Could Bounce Higher
Why Price of Silver Could Bounce Higher in 2017
Dan Caplinger – The silver market performed reasonably well in 2016, with the price of the precious metal picking up more than $2 to close the year at $15.88 per ounce. That in turn helped boost the prospects for silver-tracking investments like the iShares Silver Trust (NYSEMKT:SLV). But as much as investors appreciated the gains, they were a far cry from the highs above $20 per ounce that silver posted earlier in the year. Looking forward to the coming year, investors want to see the price of silver in 2017 climb back toward the $20 mark, but those who follow the silver market aren’t sure just how much progress the metal can make. Below, we’ll look at what could move the price of silver in 2017.
What will move silver prices in 2017?
The main difficulty that many people have in assessing the silver market is that it acts like a hybrid, showing characteristics of both precious and industrial metals. On one hand, even at prices that are less than 2% of the price of gold, silver is still roughly 100 times as costly as copper, putting silver in a gray area in the middle of the price spectrum. Historically, traders have seen silver as a precious metal, and many mines produce both gold and silver, further associating them in the minds of investors.
Yet in large part, silver is much more subject to supply and demand considerations than gold. Silver gets used in a wide variety of industrial applications, and that subjects it to the normal demand fluctuations of the global economic business cycle. In addition, mined supply of new silver plays a role in setting its price, along with the willingness of those who have stockpiled silver for investment or personal use to bring it back into the market when prices rise.
Even with those countervailing factors, silver traded largely in line with its precious metal counterparts during 2016. After a big gain linked to an early year stock market decline in 2016 and prospects for a potential collapse in the energy markets, silver climbed to its highest levels by mid-year. However, the final boost from the U.K. Brexit vote to leave the European Union didn’t lead to the economic chaos that some had predicted. By the second half of the year, excitement about silver waned, and fears of higher interest rates sent silver prices down more than $4 per ounce from their highest levels of the year.
2017 price projections on silver (per ounce)
As you can see above, there are two distinct camps among those following the silver market. Some believe that better conditions in the market will lead to substantial gains, while others see the current malaise lasting throughout 2017.
The bullish argument for silver
Most of those who are bullish about silver prices in 2017 point to silver’s capacity to decouple from the precious metals markets. In particular, excitement about silver’s industrial demand could be the driver for higher prices in the minds of some.
Helping to support that view are the latest calls from President-elect Donald Trump for greater spending on infrastructure and construction. If the U.S. moves forward with initiatives that are successful in driving greater activity on those fronts, then the use of silver could increase. At the same time, many expect that silver mining activity will fall in 2017 from year-ago levels, continuing a longer-term trend. Even with prices having bounced from their lowest levels, they’re still not high enough to make miners feel particularly enthusiastic about boosting production.
The bearish argument for silver
However, those who are negative on the prospects for silver prices in 2017 point out that the factors that traditionally hurt precious metals markets are poised to become stronger during the year. Late-year dollar strength in 2016 has typically pushed gold and silver prices lower. Moreover, with many expecting multiple interest rate increases from the Federal Reserve in 2017, the costs of holding positions in silver bullion are likely to rise from their rock-bottom levels of the past several years.
Also, the supply and demand factors that theoretically drive silver prices haven’t always matched up in the short run. Supply deficits in production of mined silver have been regular occurrences for most of the past 15 years, but that hasn’t prevented the silver market from having wild volatility swings over that time period.
What to expect from silver in 2017
Just about the only certainty with silver prices in 2017 is that they’re likely to feature substantial moves in both directions, as investors try to figure out changes in geopolitical and macroeconomic factors affecting the market. That might stop the forward momentum that silver generated in 2016, but it could also create opportunities for those who have higher hopes for silver’s prospects in the long run.
Why Price of Gold Could Bounce Higher in 2017
Dan Caplinger – Gold managed to rebound slightly in 2016, rising 8% and making back a bit of the lost ground that it had suffered in previous years. Nevertheless, the year-end closing price of around $1,145 per ounce was still far below the levels at which it has traded in the past. Over the coming year, investors would like to see gold’s modest upturn finally start to take hold and accelerate, producing gains for gold-tracking investments like the SPDR Gold Trust (NYSEMKT:GLD). Let’s look at how the gold market has fared lately and what it means for gold prices in 2017 and beyond.
What will the price of gold do in 2017?
Many are uncertain about the direction for gold prices in 2017. Last year, gold managed to post strong gains early in the year, as fears about the plunge in the energy markets and a big decline in the Chinese stock market sent many investors to the perceive safe-haven status of the precious metal. Around mid-year, gold had risen to more than $1,350 per ounce, and the Brexit decision in the U.K. to leave the European Union created even more nervousness about the global macroeconomic environment.
Yet by the end of the year, many of the potential struggles for the financial markets had disappeared. That led many investors out of the gold market, leading to the more than $200 per ounce drop in the final few months of 2016. In addition, the election of President-elect Donald Trump was followed by a big increase in interest rates, which created the specter of rising financing costs for gold investors and made the bond market look more attractive for new capital.
As a result of this price action, many of those who follow the gold market expect significant volatility in the price of the yellow metal in 2017. Depending on what actually happens with other financial markets, gold could see violent moves in either direction during the year.
2017 price projections on gold (per ounce)
As you can see from the predictions above, there are a couple of different camps among gold market analysts. One sees little change from current levels, while the other believes that gold could manage to overcome the obstacles it faces and continue posting significant increases from current levels.
The bearish argument for gold
The primary reason why some see problems for the gold market has to do with macroeconomic conditions. The odds are good that interest rates in the U.S. will rise in 2017, yet inflation won’t be the main reason why the Federal Reserve tightens monetary policy. Rather, there’s an expectation that the Fed will move simply to bring interest rates back to a normal level of monetary accommodation, while seeking to prevent inflation from moving above its 2% target. If successful, that would take away the inflation justification for owning gold.
Moreover, higher interest rates in the U.S. have typically brought strength in the U.S. dollar. Because gold prices are measured in dollars, a strong dollar tends to put downward pressure on the gold price. We’ve seen that correlation in recent months, as the post-election rally in stocks sent interest rates lower while boosting the dollar’s value against major foreign currencies like the euro and Japanese yen.
The bullish argument for gold
At the same time, one thing that many investors think could support gold is the uncertainty about geopolitical actions in the year to come. The global perception of the U.S. president-elect has raised fears of changing global alliances and greater levels of conflict, and the rise of other populist leaders in various countries throughout the world suggests a growing trend toward nationalism. That could have implications for trade, which in turn could destabilize economies that rely on trade. Historically, such situations have been positive for gold.
In addition, not everyone is convinced that a rise in interest rates will come without inflation. Gasoline prices have already risen sharply from their lows last year, and despite the dollar’s strength, a greater emphasis on manufacturing in the U.S. could force companies to raise prices to offset higher labor costs. If inflation outpaces the Fed’s gradual rate hikes, then gold could respond positively.
Expect bumpy markets for gold in 2017
Even when gold markets behave well, they rarely move in a straight line, and that’s likely to be more the case than ever this year. With surprises likely on multiple fronts, investors should expect gold prices in 2017 to be more volatile than usual, creating opportunities for those who believe in its longer-term prospects.
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