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Will We See a Replay of 2015 and 2016 in the Gold Market?


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In both 2015 and 2016, the price of gold bottomed in December, as one can see in the chart below.

Chart 1: Gold prices (London P.M. Fix) from January 2015 to October 2017.

Gold prices bottom in Decembers

Will that pattern repeat itself this year? Well, there are some strong arguments in favor of that scenario. First, the price of gold actually started to decline in mid-October, in a similar fashion to 2015 and 2016.

Second, the previous lows occurred in December, as the Fed hiked interest rates in the final month of 2015 and 2016. As a reminder, the U.S. central bank is likely to raise rates in December 2017 as well. Actually, themarket odds of such move are about 100 percent.

Third, there was a revival in the Trumps trade, as the Senate passed a budget reconciliation bill in October, paving the way for tax reform. Such a rebound in investors expectations will support risky assets and hurtsafe-haven assets such as gold .

Fourth, markets also expect that theFOMC will be more hawkish in 2018 than in 2017, due to the personal changes in the Board of Governors. Indeed, if the Senate approves Trump nominations, the new leadership at the Federal Reserve will be more hawkish than the Yellen-Fischer duo.

Fifth, the recent U.S. data was surprisingly positive. In particular, the GDP grew 3 percent in the third quarter of 2017, despite the negative impact of a few hurricanes. Actually, the current economic expansion is truly global the IMF projects the worlds economy will grow 3.6 percent this year, the best result in a decade.

Sixth, theECB meeting in October was more dovish than expected. Draghi adopted a less-but-longer approach, keeping a very accommodative stance. As we predicted in the September edition of theMarket Overview , market expectations for the ECBs pace of tightening were too elevated.

All of these factors are likely to support both theU.S. dollar and the U.S.real interest rates , which should add to downward pressure on the gold prices. As the next chart shows, the greenback and long-term real yield have been rising since mid-October (or, looking broadly, since September).

Chart 2: The U.S. real interest rates (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security) and the U.S. dollar index (green line, left axis, Trade Weighted U.S. Dollar Index against Major Currencies) over the last twelve months.

Real interest rates and the U.S. dollar index

Seventh, thegeopolitical risk seemed to ease somewhat in October. But, as one can see in the next chart, the CBOE Volatility Index has actually increased in the previous month. However, it remains at very low level (the rise resulted presumably from the conflict about Catalonia and speculations about the next Feds Chair), while thecredit spreads declined further.

Chart 3: The market volatility reflected by the CBOE Volatility Index (green line, right axis) and the credit spread reflected by the BofA Merrill Lynch US High Yield-Option Adjusted Spread (red line, left axis) over the last twelve months.

VIX and credit spread

Given all these factors analyzed above, it is actually astonishing that the price of gold did not drop more. One of the possible explanations is the synchronized global growth we have already mentioned. Although gold does not shine during periods of decent economic growth and low inflation, the synchronization means that the U.S. economy is no longer the main engine of growth among advances countries. Indeed, the long-term interest rate spread between the U.S. and Germany has been declining recently, as the next chart shows.

Chart 4: The difference between 10-year U.S. and German interest rates from October 2012 to September 2017.

Interest rate spread between U.S. and Germany

The economic revival of the Eurozone despite all of its structural problems may cause the euro to continue its upward trend in the medium-term. Importantly, the emerging markets have been growing as well. Thus, the U.S. dollar may remain under pressure, which should be fundamentally positive for the gold prices.

Having said that, the macroeconomic outlook for gold deteriorated in October. The mix of accelerating growth and lack of inflationary pressure is negative for the yellow metal. And we would not be surprised if we see a temporary bottom in gold prices in December in analogy to what we saw in the last several years. The market odds of a December hike are at about 100 percent, so their increase is fully priced into gold, and the potential for further downside movement (at least, due to the expectations of the future Feds stance) is somewhat limited. Still, if themoves in the interest rates continue to be similar to the previous series of hikes , then the USD could finally start a bigger rally and that would mean trouble for gold.

If you enjoyed the above analysis and would you like to know more about the impact of the macroeconomic factors on the gold market, we invite you to read the November Market Overview report. If youre interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If youre not ready to subscribe at this time, we invite you to sign up for ourgold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits Gold News Monitor and Market Overview Editor


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About the author


Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize. Arkadiusz is the author of Sunshine Profits’ monthly Market Overview report and daily Gold News Monitors, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes.

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