Gold price forecast for the next 5 years

Fans of the yellow metal – “goldbugs”, is the inelegant nickname – are fond of pointing out that bullion is an unparalleled store of value and stability across the centuries. One favourite statistic is that, over time, one ounce of gold will buy as many loaves of bread (a timeless measure of purchasing power) as it did in the days of King Nebuchadnezzar.

For the record, he died in 562 BC.

Broadly speaking, this is quite true. But simply because an asset holds its value on average over time does not mean that it is always the same price at all times.

“Gold’s day is done”

Let’s look at gold prices over the past 100 years, adjusted for dollar inflation, this being the currency in which it is priced. In Spring 2015, it changed hands at $496 an ounce. At the time of writing, it has risen 1.18 per cent to $1,954.35, nearly four times its 1915 level.

But if that sounds less than stable, it pales when compared with some of the period between then and now.

By January 1934, it had hit $683 an ounce before diving to $245 by January 1971. But if the Seventies started by looking bad for gold, they turned into great years for bullion buyers as the price climbed. It was in every sense a golden decade.

The all-time peak was reached in January 1980, at $2,246, as the “second” Cold War ratcheted tensions between East and West and inflation ravaged the economies of Europe and the US. Holders of gold, it seemed, could not go wrong.

But they did. A remorseless downward swing set in, taking the price to $406 in September 1999. Central banks were selling gold, led by the Bank of England, and the price touched $379 in April 2001.

Critics of the goldbugs, and there were many, declared gold’s day was done, that it had never been a proper monetary asset and that its only roles in the new world of internet banking were in dentistry and jewellery.

A century of volatility

Then recovery set in, taking the price to $2,076 in August 2011 as the eurozone debt crisis seemed to threaten the single currency and the US lost its AAA credit rating.

So in trying to make gold price predictions for the next 5 years, the first thing to bear in mind is that the price has been all over the place during the past 105 years.

Perhaps it may make more sense to look at the most recent past five years. On July 31, 2015, it traded at $1,080.05. By July 30 last year, it had climbed to $1,428.45.

Three months ago, it stood at $1,716.75 on April 30 and, one month ago, it changed hands at $1,770.70 on June 30.

The past five years, in other words, have seen the price rise by more than 80 per cent, albeit an inflation-adjusted figure would show a less spectacular increase.

Furthermore, the momentum displayed in the price charts is clearly upwards. The five-yearly low occurred on December 18, 2015, while the five-yearly high is now.

Of course, this pattern may reverse, or the price may simply stagnate. There are no guarantees and no investment “owes” anyone anything. More than chart patterns are needed to make a sensible price forecast for the next 5 years.

So what are the underlying factors that will affect the predicted gold price in the next 5 years?

Let’s go back to 2015, and a world slowly emerging from the 2008-2009 financial crisis and great recession. Gold was well below the highs seen in 2011 as it seemed that central banks and finance ministries had at least some idea of how to coax their economies back to something approaching normal.

Furthermore, the post-2001 military operations in Afghanistan and Iraq were being wound down, and public finances across the west were slowly getting into better shape. In such an environment, gold’s appeal as a safe-haven investment, famously the only asset that is nobody else’s liability and does not depend on anyone’s promise to pay, was bound to dim.

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In troubled times, investors are attracted to gold’s universal acceptability and the fact it cannot be printed or forged. But in calmer periods, they tend to notice that gold produces no returns, rather that it incurs storage costs.

Its recent rally began in 2018, as fears took hold that the West was due a recession after a long-running recovery, and its recent bull run coincided with the coronavirus epidemic and the economic effects of the measures taken to contain it.

Were the Nineties abnormal?

Looking at the prospects for the expected gold price in the next 5 years, it seems that two possible scenarios are likely. In one, we are due a repeat of the years from 1980 to the end of the century, in which bullion enters what is called a “secular” downswing, in other words a decline that is unaffected by either the business cycle nor by events that may normally be assumed to have an impact on the price, such as economic crisis or war.

In this view, gold’s gradual recovery after the turn of the Millennium mirrored the gradual darkening of what had been an optimistic economic and political picture after the fall of the Berlin Wall in 1989, as talk of a digital “new economy” gave way to the war on terrorism and, at the end of that first decade, the financial crisis.

The current spike, in this view, is really 1980 revisited, with the coronavirus taking the place of nuclear tensions. As with those tensions, the virus, too, will pass, as will its economic effects, and conventional assets such as shares, bonds and currencies will reassert their appeal.

Anyone buying gold now will, in short, be buying near the top. Remember that, in inflation-adjusted terms, those who bought at the 1980 peak have still to see their money being returned.

But an alternative scenario would hold that the years after 1989, especially the Nineties, were abnormal in the alignment of economic and political conditions that appeared to offer indefinite prosperity through institutions such as the European single market and the World Trade Organisation. Such a period may recur at some point in the future but not within the next five years.

On this view, gold remains a solid bet.

Which scenario to pick in assessing the gold rate in the next 5 years? It really depends on how optimistic you are for a speedy return to economic stability.

In short, if you believe that “now is the new normal”, you should probably buy gold. If you expect the “old normal” to reassert itself, you probably should not.