Gold Fundamental Analysis – Forecast for the Week of January 16, 2017

Gold futures rallied to a seven-week high last week, briefly crossing the $1200 mark, with economic and political uncertainty boosting its safe-haven appeal. This week’s price action was primarily driven by safe-haven buying related to the impending inauguration of President-elect Donald Trump. However, investors also reacted to seasonal Chinese demand and a slowdown in the equity market rally as well as the U.S. Treasury debt instrument sell-off.

February Comex Gold finished the week at $1196.20, up $22.80 or +1.94%.

The rally was supported early in the week by a weaker U.S. Dollar which made dollar-denominated gold a more attractive investment for foreign buyers. The Greenback has been losing its upside momentum due to a drop in U.S. T-Bond yields, which have fallen considerably from two-year highs reached in mid-December.

Gold futures are highly sensitive to U.S. interest rates. When rates rise, gold prices tend to fall because of increased opportunity costs since gold pays neither interest nor a dividend to hold it. Contrarily, gold prices tend to be supported by falling interest rates.

Trump provided some fireworks for gold traders on January 11 during a press conference when he failed to talk about key policy issues that were supposed to give investors guidance about his plans to boost fiscal spending cut taxes and relax banking regulations.

There has also been underlying support recently due to uncertainty over events related to Britain’s exit from the European Union, French elections in April and the impact of Trump’s trade policies.

Forecast

Last week, gold showed great sensitivity to both Trump’s comments and the lack of comments on some key areas. This trend is likely to persist even after his inauguration on January 20 as long as he continues to delay revealing his plans to make America great again as he promised during his campaign and especially on election night. Because of this, we’re looking for gold prices to remain more volatile than usual.

Although comments from Trump are likely to cause periodic price swings, the overall trend is likely to continue to be controlled by the direction of U.S. Treasury yields and their impact on the direction of the U.S. Dollar.

This week, investors will have the opportunity to react to several major reports that could create volatility in the Treasury markets especially since they could have an impact on the Fed’s next monetary policy decision.

On January 18, investors will have to deal with the latest data on consumer inflation. The CPI is expected to show a rise of 0.3%. Core CPI is expected to come in at 0.2%. Fed Chair Janet Yellen is also scheduled to speak. She may offer some insight into current economic conditions and their potential impact on the Fed’s decision to raise rates.

On January 19, reports include building permits, the Philly Fed Manufacturing Index and weekly Unemployment Claims. Yellen will also deliver another speech.

We expect gold to continue to show strength as long as the uncertainty with the Trump administration persists, however, the rally will slowly start to grind to a halt once investors get clarity from Trump on his policies and the Fed on the timing of the next interest rate hike.