Gold

Gold is the world's original reserve currency. The precious metal serves many functions today, including (1) as a barometer of US dollar liquidity conditions, (2) as a means of assessing geopolitical risks and (3) as a hedge against high rates of inflation. The precious metal is particularly sensitive to US real interest rates, with gold prices rising when real rates fall and vice versa. 

Short term outlook
Neutral
Medium term outlook
Bullish

Daily update

Gold prices are falling today. Yesterday, the precious metal rebounded following three days of sell-offs. While US Treasury yields rose yesterday, gold was helped by weakness in the US dollar. 

Today, gold prices are falling as both the US dollar and US Treasury yields rise. Thanks to strong US economic growth, rising inflation is stoking fears that the Federal Reserve may be more aggressive in raising interest rates. As a result, bond yields are soaring. 10-year Treasury bonds are currently yielding 3.017%. The last time 10-year Treasuries traded near similar levels was back in April 2011. The dollar is also rising as US growth outperforms its global peers. Given gold's sensitivity to dollar strength, the ongoing bullish trend is increasingly at risk. If the dollar enters a bullish trend, expect the precious metal to weaken accordingly. Our short-term outlook is neutral, while our medium-term outlook on gold remains bullish. 

After its most recent top around $1,353, gold is now above $1,324.

Updated 

Gold Outlook

Short term outlook
Neutral

As gold prices trade sideways, we are now neutral on gold in the short-term. Note that gold is now trading within a normal range. This is based on various technical indicators on the daily chart. 

Medium term outlook
Bullish

Following recent strength in gold, we are upgrading the precious metal to bullish in the medium-term. The precious metal is trading within normal conditions. This is based on technical indicators on a weekly chart. 

Updated 

Background

Policy: While gold sold off in November 2016 in response to rising inflation expectations (which typically elicits a monetary policy response in the form of rate hikes), gold has bounced back in 2017 and 2018. This is largely because inflation expectations fell after the first quarter of 2017, while the US dollar entered a long-term bear market. While recent tax cuts were expected to raise the outlook for inflation, ongoing weakness in the US dollar has overshadowed hopes for stronger inflation. Looking at gold in 2018, the US dollar bear market and a subdued outlook for inflation should keep gold on a strengthening path.    

Sentiment: Gold has hit overbought levels according to technical indicators on a daily chart a few times in recent history. Each time, gold prices have pulled back after looking overbought. Looking at the Commitments of Traders report, speculator net positions are not yet at a bullish or bearish extreme. Accordingly, sentiment is not slowing down momentum behind the precious metal. In 2018, sentiment behind gold has been mostly bullish. If sentiment hits a bullish extreme, one should expect gold prices to experience a short-term pull back.  

Economic data: With global economic growth accelerating and inflation subdued around the world, the fundamental outlook for gold is positive. Gold prices tend to strengthen when global growth is strong, as the US dollar tends to weaken under such conditions. On the other hand, low inflation ties the hands of central bankers wanting to raise interest rates, which also supports gold prices. Thus the outlook for gold, based on the current economic environment, remains positive. 

Analysis

Last week, we wrote that weakness in the US dollar is masking growing risks. As equities, commodities and corporate credit are inversely correlated to USD, investors need to pay attention to the risk of a US dollar rebound. Since early 2017, gold prices have gradually strengthened. As the precious metal serves as a barometer for US dollar liquidity, the clear message from gold was that monetar…

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Tags: Gold

Since early 2017, gold has strengthened from lows below $1,080 to around $1,340 today. The underlying factors that have helped gold strengthen since that time remain intact. We argue that gold should continue strengthening in the longer-term thanks to (1) moderate sentiment, (2) continued weakness in the US dollar, and (3) a weak outlook for real interest rates. While recent price action is somew…

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Following yesterday’s statement from the Federal Reserve, the odds of a rate hike are soaring according to the CME’s FedWatch tool. The current market-implied probability for a hike on March 21, 2018 (the next Fed meeting) is 83.1%. One month ago, on December 29, 2017, the odds of a March hike were just 50.7%. According to prevailing wisdom, the Federal Reserve has significant control over moneta…

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Tags: Gold