Gold continues to climb higher and is now firmly above $1,300. Looking at recent history, the precious metal has been either up or flat for the last 10 trading sessions. Gold is enjoying tailwinds from both a weak US dollar and falling nominal yields. As we have written before, the precious metal trades inversely to real interest rates, and is therefore a good barometer of US dollar liquidity. Given gold's function as a monetary alarm signal, sustained strength in gold typically suggests excessive liquidity. Strong price action after bottoming on December 12 suggests that US dollar liquidity remains plentiful. Prior to the New Year, rising interest rates on US dollar swaps in Eurodollar markets had raised fears of a potential dollar shortage. After the European Central Bank and the Bank of Japan tapped the US Federal Reserve's USD swap line, Eurodollar lending rates fell sharply. Later today, we will upgrade our short-term outlook to bullish while upgrading our medium-term outlook to neutral.
After its most recent bottom around $1,240, gold is now above $1,308.