NEWS AND ANALYSIS

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Gold has had a very good run so far this year. But it is now knocking up against significant resistance which can be seen quite clearly in the chart below.

https://www.spreadco.com/assets/pm21.02.17v1.png

This key area of resistance comes in around $1,240/50 for gold. We can see how this area marks the 50% retracement of the July- December 2016 sell-off. Back in July gold hit its highest level since March 2014. The rally in the first half of last year appeared to be something of a renaissance for gold following a relentless sell-off between September 2011 and December 2015. However, the spike higher which followed hot on the heels of the UK referendum over EU membership now looks as if it was the last hurrah before a reversal took hold. For a few months this looked like little more than a corrective move and consolidation after the gains made earlier in the year. However, Trump’s surprise election victory in November led to a concerted sell-off which drove out all the speculative longs until there were no sellers left. And that set the scene perfectly for the bounce we’ve seen since.

But it’s impossible to consider the gold price without reference to the dollar, and this is where things get interesting. There are two conflicting forces acting on the dollar currently - the Trump administration and the US Federal Reserve. The Fed has made it clear that it expects to tighten monetary policy this year, by as much as 75 basis points according to its Summary of Economic Projections from back in December. The central bank says that the US economy is close to full employment while inflation is closing in on its 2% target. At the same time the Fed is desperate to try and “normalise” rates, particularly as it wants some leg room so it can cut later should the economy look like slowing in future. So with other developed country central banks keeping monetary policy accommodative, this tightening bias from the Fed should keep the dollar heading higher for now. This in turn should mean that gold will struggle to make much headway - unless inflation really takes off.

On the flip-side, the Trump administration has repeatedly talked down the dollar. Trump has openly said that the greenback is “too strong” and is doing this in an effort to keep US goods competitively priced on the international market to boost exports. On top of this the Trump administration has accused China, Japan and Germany of taking advantage of currency weakness and has warned that this can’t continue. But the problem for Trump is that he has promised tax cuts, infrastructure spending, regulatory roll-back, tariffs and immigration control. Every one of these policies has the potential to boost inflation, which in turn raises bond yields which puts more pressure on the Fed to raise rates which would be dollar-positive. If the Fed can keep inflation in check, then the dollar’s rise is likely to be slow and steady, and negative for gold. But if inflation takes off, then investors will rush into gold as a safe haven, irrespective of what happens to the dollar.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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