The performance of the gold price over the past several months reflects investors’ bullish sentiment toward gold.
The all-time high for the precious metal came in early December. One of the main reasons for this optimism is a dramatic reduction in the U.S. deficit, which has recently dropped by more than half in the past year check the gold price.
The fact that this reduction has already prompted the Fed to stop its quantitative easing (QE) policy suggests that the market thinks that the U.S. government has finally reduced its fiscal deficit enough to start reducing interest rates.
As a result, gold is now on a sure footing to return to its usual function as a diversifier in investors’ portfolios.
In this note we estimate that the price of gold will reach $1,997 by the end of 2021. The annualized return on investment will be 5.9% over the next five years also check the 18 karat price.
The bottom line of this note is that gold will continue to be an excellent investment even in the foreseeable future.
Why the price of gold will reach $3,091 in 2026?
The price of gold rose more than $500 during the first six months of 2016 and closed the year at a record $1,095 an ounce.
The price reached a historic high of $1,295 in early December and is currently trading close to $1,230, nearly 50% higher than the year-ago level.
At first glance this might seem like a record-breaking rally. However, the rally was not driven by an influx of new buyers.
At the time of writing the amount of gold owned by investors was almost at the same level as a year ago, which means that the long-term trend of the gold price did not change.
Therefore, the recent rise in gold prices did not confirm investors’ optimism about gold. In fact, most of the current investment activity was a function of investors’ anticipation of a significant reduction in the U.S. deficit.
For the first time since 2011 the U.S. government can expect to see a reduction in its budget deficit in the coming years.
The changes in the U.S. fiscal deficit are almost as big as the U.S. currency’s current depreciation over the same period, which indicates that the net deficit will decline sharply.
At the beginning of 2016, U.S. fiscal deficit was $486 billion. However, a modest reduction in the current deficit of $500 billion will lead to a $600 billion reduction in the budget deficit.
How big a reduction will the U.S. fiscal deficit undergo in 2016?
The U.S. government expects to post a primary deficit of $349 billion this year (which is equivalent to a $550 billion primary deficit).
Now imagine what a $600 billion reduction of the U.S. fiscal deficit will look like?
As a result, the U.S. government will have to collect an additional $1.4 trillion in taxes over the next five years.
Although the U.S. government can count on approximately $800 billion in automatic tax cuts from the recently enacted tax bill, this amount will not be sufficient to offset the large decline in revenues.
Therefore, we expect that the U.S. fiscal deficit will shrink to an average of $500 billion in 2016, 2017 and 2018.
In 2017 and 2018, the U.S. government will most likely raise its spending more than it has in the past. This can be observed from the recent fiscal projections, which project a rise in federal spending to around $1.5 trillion a year over the next three years.
The U.S. government will most likely continue to increase spending even after the recent tax cuts.
We expect that the U.S. fiscal deficit will surpass the $1.6 trillion mark in 2018, which means that the U.S. government will still be forced to collect at least $600 billion in taxes every year to fund the current budget deficit.
The reason for this optimism is the significant reduction in the U.S. fiscal deficit over the past year also check these oilpricez.