Price of Gold in 2017: Why It Could Bounce Higher

By Dan Caplinger Markets Fool.com

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.

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Image source: Getty Images.

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.

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2017 price projections on gold (per ounce)

Citi Research

$1,180

B of A Merrill Lynch

$1,200

RBC

$1,245

UBS

$1,350

ABN Amro

$1,131

BMO

$1,175

Data source: Analyst projections via Kitco.

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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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.