Gold has now strengthened beyond $1,300 and has been up for the last six sessions consecutively. This morning, the precious metal is flat despite strength in the US dollar. Last Friday, gold rallied on lower-than-expected CPI numbers, which weakens the case for the Federal Reserve to raise interest rates. As we explained in our previous thought piece on the relationship between gold and inflation, the precious metal is sensitive to both nominal interest rates and inflation (i.e. real rates).
While actual inflation figures remain weak, inflation expectations are rising thanks to increasing Republican support for Trump's tax reforms. This weekend, news reports suggested that Republican Senators Paul and Collins are likely to vote 'yes' on the upcoming tax bill. As markets rediscover the 'Trump trade', inflation sensitive assets such as gold may weaken in the future.
Looking at technical indicators, gold is neither overbought nor oversold today and is trading within normal conditions. After its most recent bottom close to $1,270, gold is now above $1,304.
After rebounding from oversold conditions in early October, we are now bullish on gold in the short-term. We previously warned that the precious metal was looking oversold and due for a rebound. The precious metal has since re-entered normal trading conditions, based on various technical indicators on the daily chart.
After a strong performance in the second week of October, we are now bullish on gold in the medium-term. The US dollar has been weak, and is pulling back after moving into short-term overbought conditions. There are also doubts about Trump's ability to get tax reforms through Congress. The caveat is that gold is trading close to overbought conditions when looking at various technical indicators, thus caution is warranted.