Gold fell sharply yesterday and continues to fall this morning. According to Bloomberg, Trump is favoring John Taylor to be the next Fed Chair. Taylor's odds to become the next Fed Chair have increased in betting markets accordingly. Given his 'Taylor Rule' (which suggests US interest rates should be north of 3.5%), US bond yields are rising on increased rate hike expectations. Unsurprisingly, gold is falling as a result. We have lowered our short-term outlook on gold to neutral this morning.
In our recent thought piece on gold and inflation, we explained that the outlook for the precious metal was weak in an environment of falling inflation and rising interest rates. With talk of John Taylor becoming the next Fed Chair, interest rates are expected to rise even more sharply, further hurting the case for buying gold. Until the trajectory of inflation changes, gold is likely to weaken from here.
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 below $1,290.
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.