There has been a stabilization in the gold and gold stocks after they formed a short-term depression. This stabilization even held up considerably well, while the US Dollar Index accelerated to an 8-month high. If you listen to conventional wisdom, you will note that the USD Index is close to a major breakout and this makes the gold and gold stocks more vulnerable to further losses. However, many insightful analysts and traders believe that Gold and the USD Index can climb together. Even though the trend with the USD Index is significant, it is not the primary driver of Gold. This trend means that, ultimately, provided that Gold’s fundamental driver, the decline or the negative real rates, remain in place. Once Gold’s primary driver is in place, then the fledgling bull market will stay on the right track.
Since the middle of 2015, the real rates have descended. The drop in real rates explains why there has been a sustaining in the recovery in Gold in 2015.
The Federal Reserve can raise the rates. However, inflation is increasing. The recent market action notes that inflation and inflation expectations will continue to rise into 2017. Different inflation metrics like the difficult CPI and core CPI display inflation which is above 2-percent, not including higher energy prices, which may occur in the coming months. The week closed with a 15-month high for Oil. During the recent weeks, there has been a surge in Oil above important averages, namely the 200 and 400-day.
This means, the likely increase in inflation could easily overshadow a low quarter point rate hike. During the mid-2000s and 1970s, inflation rose quicker than the interest rates. This caused Gold to perform well. When inflation rises, the interest rates are raised by the Fed. However, the Fed is often set to remain behind the curve and allow the inflation to flow by itself. This is hard-hitting for Gold in USD terms, even if there is a good performance on the USD Index side.
Something else to take note of is Gold’s performance against other currencies. The table below shows how gold is in an uptrend against all other foreign currencies.
At the end of the day, the most important driver of Gold is negative or declining real interest rates. With the inclination of inflation set to rise, the real rates are more than likely to continue to decline in 2017. If there is an increase in the USD Index, then this could put a hold on Gold’s performance in USD terms.
On the other hand, the presence of negative real rates that has been combined with continued out-performance in non-USD currency terms that would assist the bull market.
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