The upward trend in gold was confirmed following the release of economic data and Dutch election last week, for the following reasons:
- The consumer price data was up and confirmed the moderate trend of rising inflation. With inflation reading of 1.9 percent, it is approaching the Fed target of 2 percent.
-The Fed hiked interest rate by a quarter percent as expected, but the dovish tone from Janet Yelen and the fact she was very clear about the gradual tightening of monetary policy , sparked the gold rally.
Yallen gave a clear indication of two more interest rate hike this year ( no different from her comments in December meeting ) and three for 2018.
Let us look at 2017:
Prior to the Fed meeting, the interest rate hike was priced fully and even more in the gold price.
The market reaction is now showing me that not only the recent interest rate hike was priced in, but also the two further interest rate hike. The clear pathway of gradual monetary policy is removing the uncertainty overhanging the gold market.
Rising inflation and two more interest rate hikes for 2017 means that the real interest rate is going deep into negative territory and weighing lower on the US dollar.
Real interest rate= nominal interest rate- inflation rate
Nominal interest rate for 2017 will be around 1.25 to 1.5 percent minus inflation rate of currently 1.9 percent, we are already expecting persistent negative real interest rate.
With further rise of inflation as expected, the negative real interest rate will dive deep into the negative territory, leading to lower US dollar and that is very supportive for gold price rise.
That was reflected in Janet's speech when she said that the Fed will tolerate inflation overshooting its target of 2 percent.
-The Dutch election showed (Wilders, although not winning) rising of the populist party with 20 seats in parliament from currently of only 12 seats. That advance of Wilders's party set the scene for the French election which is a big mover for gold.
The Fed ongoing accommodative policy, the Brexit, rising inflation, the French election, the geopolitical tension with remarks from Tillerson of pre-emptive strike of North Korea and the big budget deficits of trump with impending clashes and fight in the Congress, are all the good reasons for gold to shine in 2017.
If a blind investor like me hear about all these noises, I am sure the smart investors are seeing these facts and they are the ones that are driving gold price up.(eg, Druckenmiller).
In short, Gold will shine at least for the next 6 month.
My thoughts, nothing more.
Sydney
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