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Why Was Gold So Cheap in 2016?

Published in Gold Market Analysis 2 mins read

Gold was relatively cheap in 2016 primarily due to a surging stock market that drew investor interest away from precious metals, coupled with broader macroeconomic factors. Despite an initial rally earlier in the year, the latter part of 2016 saw gold prices disappoint many investors.

Key Factors Contributing to Gold's Price Slump in 2016

Several forces converged to suppress gold's value throughout 2016, making it a less attractive investment compared to other assets.

Stock Market Rally

A significant contributor to gold's subdued performance was the robust rally in the stock market. Following the U.S. presidential election, an optimistic outlook on economic growth and corporate earnings fueled a strong upward movement in stock prices. This market enthusiasm often comes at the expense of safe-haven assets like gold:

  • Shift in Investor Sentiment: As equity markets soared, investors typically shifted their capital from perceived safe havens, which offer no yield and are seen as hedges against uncertainty, into riskier but potentially more lucrative stocks.
  • Opportunity Cost: The high returns available in the stock market made the opportunity cost of holding gold — which saw little appreciation — particularly high, leading many to liquidate gold holdings or avoid new purchases.

Macroeconomic Issues

Beyond the stock market's strength, various macroeconomic issues also played a role in gold's slump during 2016. While not explicitly detailed, these often include factors that reduce the appeal of non-yielding assets:

  • Strengthening U.S. Dollar: A stronger dollar typically makes gold more expensive for holders of other currencies, potentially dampening demand.
  • Anticipation of Interest Rate Hikes: Expectations of rising interest rates can increase the attractiveness of interest-bearing assets (like bonds) relative to gold, which offers no yield.
  • Inflation Expectations: If inflation expectations are low, gold's traditional role as an inflation hedge becomes less compelling.

In summary, even the significant event of the U.S. presidential election, which might typically induce market uncertainty and boost gold, did not create a lasting upward trajectory for the metal in 2016. Instead, the ensuing stock market rally overshadowed gold's appeal, contributing significantly to its perceived cheapness that year.