Omri Elani is a Junior Business Developer & Research Analyst for I Know First. Also a frequent contributor for the investment research website Seeking Alpha.

Gold forecast

Gold Forecast For 2016 Based On A Predictive Algorithm

Summary

What analysts are expecting to happen to gold in 2016 and why

What analysts are expecting to happen to gold in 2016 and why How I Know First predicted 2015’s gold performance.

Gold forecast for the short, mid, and long term based on our predictive algorithms in 2016

Fundamental Analysis – What to expect in 2016

It is thought that gold prices will not climb too high this upcoming year, however a peak of $1,700 an ounce or more could come as early as the summer of 2016.

According to Chintan Karnani, chief market analyst at Insignia Consultants “Gold will see another parabolic bull run from July 2016″.

US interest rate movements and US dollar strength will still drive gold prices up throughout 2016. Although in a more diminished role, similar to base metals and marginal cost, economics play a role in setting gold prices as well, therefore it is worth keeping an eye on them too.

It is worth highlighting that lately, cheaper fuel and depreciated local currencies have led to declines in base metals mining costs. For example, average gold mining costs have decreased by about 13% to around $685/oz in 2015 compared to the 90th percentile cost level sitting at around $950/oz. It is thought these costs will keep decreasing towards the end of 2015 and throughout 2016.

Figure 1: Gold Prices in 2015

Gold hovers near a 5-year low as ETP’s drop to lowest since 2009, consequently, gold demand climbed 8% to 1,121t compared to 1,042t in 3Q15. A sharp price drop reduced consumer demand before a rebound as speculative Western investors deferred US rate rise expectations. Jewelry and bar/coin demand increased by 6% and 33% YTD, while ETF’s holdings declined further. It is worth noting that central banks continue to build their holdings of gold, adding 175t to official reserves.

When turning our attention to commodity prices we see a slump in the previous four years. Yet, according to the Economist Intelligence Unit, commodity prices will improve only marginally next year. The report states that prices for industrial raw materials will rise by 3.3% in 2016 coupled with an increase in energy price. Morgan Stanely is also not optimistic about the forecast for copper and nickel, as they cut their forecast by 14% and 19%.

What Our Algorithm predicted for 2015

I Know First utilizes an advanced algorithm based on artificial intelligence and machine learning to predict market performance for over 1,400 markets including stock forecasts, world indices, commodities, interest rates, ETFs, and currencies. The system follows the flow of money from one market into another.

The figure below shows the Gold ticker forecast for 1 month, 3 months and a year time frame, dating December 28th 2014. This is linked to our article published Seeking Alpha on the 31st of December 2014.

figure 2: I Know First GLD Prediction for 2015

An explanation about how to read the forecast is further elaborated here.

As can be seen from the figure above, the algorithm forecasted a bearish trend for physical gold in the three time periods displayed.

YTD Forecast Performance Review

The diagram above shows the performance review of the YTD (7/12/15) forecast related to the 1 year forecast in figure 2. The price on December 7th 2014 was 1204.5$ per ounce a year to date is was 1060.58$ per an ounce. This translates to a dramatic 11.49% fall in prices.

Forecast for 2016

The chart below includes I Know First’s forecast for physical gold from December 1st. As one can see the algorithm is bearish in the 1-month, 3-month, and 1-year time horizons.

The forecasts below shows a type of output from the algorithm in the form of a heat map. In each box of the heat map, there is the ticker symbol, the signal and the predictability indicator. When reading this forecast, please note that forecasts with longer time horizons tend to be more accurate than short-term predictions.

Conclusion

For many years, gold was perceived as a safe haven during times of commotion or as an inflation hedge against the Federal Reserve’s easy-money policies. Investors often invest in gold as to hedge against rising consumer prices or depreciating currencies. However, the market has changed as the precious metal had very little price reaction to the United States government’s liquidity measures, which is a new behavior from how gold has acted historically. The norm is the past was that investors would rush to buy gold when the market is uneasy, yet this is now not the case. Recent events such as the stock market sell-off in late August and the Paris terrorist attacks have not halted gold’s fall.

I Know First’s algorithm is currently denoting a bearish tone for each time horizon, with respect to physical gold. This advanced system relies mainly on technical factors but is very complex. The algorithm utilizes fifteen years of historical data and is updated daily so each prediction has the potential to change as new information is added each passing day. While Wall Street has been on an upward trend, Main Street has not had the same story. Investors should also consider this factor when fashioning an outlook for the overall economy in 2016