The 2017 is almost gone. The last eleven months were not perhaps a spectacular time for gold, but it managed to rise more than 12 percent year-to-date, as one can see in the chart below.
Chart 1: Gold prices year-to-date (London P.M. Fix).
November was rather dull for the gold market – the price of the yellow metal increased more than 1 percent, but it remained within the recent tight range. Actually, gold prices have been stuck in one of the narrowest trading ranges for years. How will the golden vehicle finish the final lap of the year? Will it finally jump above $1,300 or will it bottom, just as 2015 and 2016?
To answer this question, let’s analyze the most important long-term fundamentals of gold. First, as the chart below shows, the U.S. dollar weakened in November due to the increased uncertainty about the prospects of tax reform.
Chart 2: Gold prices (yellow line, left axis, London P.M. fix) and the U.S. dollar index (red line, right axis, broad trade weighted index) year-to-date.
The medium-term trend of the greenback does not look encouraging, but there was a rebound in September. And we bet that the U.S. dollar is likely to strengthen when the tax reform bill passes, as it implementation will reduce uncertainty and could unleash spending.
And one can see, there is also a significant negative correlation between gold and the U.S. real interest rates (here reflected by the 10-year inflation indexed Treasuries).
Chart 3: Gold prices (yellow line, left axis, P.M. London Fix) and the real interest rates (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security, in %) year-to-date.
We expect that with steady growth in the GDP and still subdued inflation, the real yields should increase over time. The rising real interest rates will be a major headwind for the gold prices. The key thing here will be inflation rate – or actually inflation expectations.
