The price of gold has been rising this year. What does that mean for the gold market?
Yesterday, gold prices hit $1,190- the highest level since November 2016. So far, the price of the shiny metal has increased almost 4 percent this year. What were the reasons behind the reversal? I will probably not surprise anyone pointing out the real interest rates and the U.S. dollar. Let’s look at the two charts below:
Chart 1: The price of gold (blue line, left axis, London P.M. Fix) and real interest rates (red line, right axis, yield at 10-year Treasury Inflation-Indexed Security, in %).
Chart 2: The price of gold (blue line, left axis, London P.M. Fix) and the U.S. dollar (red line, right axis, Trade Weighted Index against Major Currencies).
As one can see, U.S. inflation-indexed bond yields and the U.S. dollar were significantly down from the December’s highs. The decline corresponded with the rise in gold prices. Does it imply that the yellow metal has bottomed out and the bullish rally has just begun? Gold definitely has some room to move a little higher, especially if Trump fails to meet the investors’ elevated expectations. Today is his first press conference since the U.S. presidential elections, so it may be a hot day for the markets; particularly considering that investors are vexed. No President elect before has waited so long with the press conference after winning the election.
However, as we wrote in the today’s, “gold’s upside potential appears very limited and the downside potential seems very big (for the following weeks and months);” even more so if the President-elect reassures investors that he is going to boost economic growth somehow.
Overall, the medium-term outlook remains rather bearish, as the U.S. dollar has kept the status of the least ugly currency. There are many risks which may materialize this year, but most of them seem to be concentrated in Europe (Brexit, Italian banking system, elections in Germany and France, Russian threats). However, the presidential election showed that market sentiment may shift really quickly.