January Gold Rush: Bullion Rallies to Ten-Week Highs on Falling Dollar, Trump Rhetoric
February 9, 2017 9:32 am
After a stellar month of January, gold prices surged to two-and-a-half month highs last week, as a tumbling U.S. dollar and geopolitical risks boosted demand for haven commodities.
Spot gold (XAU/USD) settled at $1,220.28 a troy ounce on Friday, the highest since November 16. Bullion rose 2.4% during the week after adding more than 9% in January – its biggest gain in seven months.
With last week’s advance, gold is back in bullish territory, based on the Relative Strength Index (RSI) and MACD.
Gold wasn’t the only metal with upward mobility last week. Silver prices posted their sixth consecutive weekly gain to close at nearly three-month highs. Spot silver (XAG/USD) closed at $17.52 a troy ounce on Friday, having gained 2% during the week.
The latest rally in precious metals can be attributed to several factors, including a weaker U.S. dollar, geopolitics and even U.S. monetary policy.
U.S. Dollar Approaches Three-Month Lows
The U.S. dollar has been in a perpetual downtrend since the start of January, helping gold prices recoup massive losses in the final months of 2016. After soaring to nearly 14-year highs at the start of January, the U.S. dollar has declined more than 2% against a basket of other major currencies. The dollar index closed at 99.87 on Friday; two days earlier, it traded at its lowest in almost three months.
Gold is priced in dollars and therefore highly sensitive to fluctuations in the U.S. currency. A weaker dollar makes gold more affordable for international buyers when converting their foreign currency into greenbacks.
The dollar’s recent slump has been largely attributed to U.S. President Donald Trump, who has successfully “talked down” the currency in recent weeks. The President has said the dollar is “too strong” because China was actively keeping its own yuan renminbi weaker.
“Our companies can’t compete with them now because our currency is too strong, and it’s killing us,” Trump said in an interview with The Wall Street Journal.[1]
Trump’s top economic advisor Peter Navarro also criticized Germany for exploiting an undervalued euro to run up a large trade surplus, signalling Washington’s growing displeasure with what it deems to be unfair trade advantages.[2]
The euro briefly traded at 13-year lows against the dollar earlier this year.[3]
Trump Rattles Markets
Prior to last week, risk sentiment in the financial markets had drifted sideways on concerns of a more protectionist United States. Mere days after inauguration, Trump issued executive orders withdrawing the United States from the Trans-Pacific Partnership (TPP) and pledging to renegotiate the North American Free Trade Agreement (NAFTA). Although the executive orders are intended to protect the interest of American workers, it’s unclear whether they will translate into meaningful reform.
NAFTA has governed trade relations between the United States, Canada and Mexico for over two decades. It also adds hundreds of billions of dollars annually to the U.S. economy.
Equities Inconsistent
U.S. stocks closed near record highs last week after Trump ordered his Treasury secretary to begin reviewing the Dodd-Frank legislation, a sign the Republicans were mobilizing to deregulate the financial markets. The rally came after weeks of uncertainty stemming from mixed corporate earnings and other executive orders concerning immigration. Trump’s travel ban on citizens of seven Muslim-majority countries last month roiled the financial markets over fears of immigration reform. Policy analysts say reforms targeting visa workers are also pending.
Fed Stands Pat – For Now
Gold investors also breathed a sigh of relief last week after the Federal Reserve kept monetary policy on hold and gave no hint about whether it will raise interest rates at the March meeting. The Fed’s official policy statement acknowledged improvements in business and investor sentiment, but gave no timetables on the path of monetary policy. Traders don’t expect a rate hike before June, according to the CME Group’s 30-day FedWatch Tool.[4]
Despite the recent rally, the outlook on gold is still up in the air as investors anticipate higher interest rates and deregulation from Trump’s cabinet. These forces could lead to higher risk appetite and greater demand for the dollar, forces that have traditionally undermined precious metals.
[1] Richard Rubin and Peter Nicholas (January 16, 2017). “Donald Trump Warns on House Republican Tax Plan.” The Wall Street Journal.
[2] Darrell Delamaide (February 3, 2017). “Opinion: Trump aide dares tell the truth: Germany exploits weak euro to gain trade advantage.” Market Watch.
[3] Dan Cancian (December 20, 2016). “FX Focus: Euro hits 13-year low against the dollar as trouble mounts in the Eurozone.” IB Times.
After a stellar month of January, gold prices surged to two-and-a-half month highs last week, as a tumbling U.S. dollar and geopolitical risks boosted demand for haven commodities.
Spot gold (XAU/USD) settled at $1,220.28 a troy ounce on Friday, the highest since November 16. Bullion rose 2.4% during the week after adding more than 9% in January – its biggest gain in seven months.
With last week’s advance, gold is back in bullish territory, based on the Relative Strength Index (RSI) and MACD.
Gold wasn’t the only metal with upward mobility last week. Silver prices posted their sixth consecutive weekly gain to close at nearly three-month highs. Spot silver (XAG/USD) closed at $17.52 a troy ounce on Friday, having gained 2% during the week.
The latest rally in precious metals can be attributed to several factors, including a weaker U.S. dollar, geopolitics and even U.S. monetary policy.
U.S. Dollar Approaches Three-Month Lows
The U.S. dollar has been in a perpetual downtrend since the start of January, helping gold prices recoup massive losses in the final months of 2016. After soaring to nearly 14-year highs at the start of January, the U.S. dollar has declined more than 2% against a basket of other major currencies. The dollar index closed at 99.87 on Friday; two days earlier, it traded at its lowest in almost three months.
Gold is priced in dollars and therefore highly sensitive to fluctuations in the U.S. currency. A weaker dollar makes gold more affordable for international buyers when converting their foreign currency into greenbacks.
The dollar’s recent slump has been largely attributed to U.S. President Donald Trump, who has successfully “talked down” the currency in recent weeks. The President has said the dollar is “too strong” because China was actively keeping its own yuan renminbi weaker.
“Our companies can’t compete with them now because our currency is too strong, and it’s killing us,” Trump said in an interview with The Wall Street Journal.[1]
Trump’s top economic advisor Peter Navarro also criticized Germany for exploiting an undervalued euro to run up a large trade surplus, signalling Washington’s growing displeasure with what it deems to be unfair trade advantages.[2]
The euro briefly traded at 13-year lows against the dollar earlier this year.[3]
Trump Rattles Markets
Prior to last week, risk sentiment in the financial markets had drifted sideways on concerns of a more protectionist United States. Mere days after inauguration, Trump issued executive orders withdrawing the United States from the Trans-Pacific Partnership (TPP) and pledging to renegotiate the North American Free Trade Agreement (NAFTA). Although the executive orders are intended to protect the interest of American workers, it’s unclear whether they will translate into meaningful reform.
NAFTA has governed trade relations between the United States, Canada and Mexico for over two decades. It also adds hundreds of billions of dollars annually to the U.S. economy.
Equities Inconsistent
U.S. stocks closed near record highs last week after Trump ordered his Treasury secretary to begin reviewing the Dodd-Frank legislation, a sign the Republicans were mobilizing to deregulate the financial markets. The rally came after weeks of uncertainty stemming from mixed corporate earnings and other executive orders concerning immigration. Trump’s travel ban on citizens of seven Muslim-majority countries last month roiled the financial markets over fears of immigration reform. Policy analysts say reforms targeting visa workers are also pending.
Fed Stands Pat – For Now
Gold investors also breathed a sigh of relief last week after the Federal Reserve kept monetary policy on hold and gave no hint about whether it will raise interest rates at the March meeting. The Fed’s official policy statement acknowledged improvements in business and investor sentiment, but gave no timetables on the path of monetary policy. Traders don’t expect a rate hike before June, according to the CME Group’s 30-day FedWatch Tool.[4]
Despite the recent rally, the outlook on gold is still up in the air as investors anticipate higher interest rates and deregulation from Trump’s cabinet. These forces could lead to higher risk appetite and greater demand for the dollar, forces that have traditionally undermined precious metals.
[1] Richard Rubin and Peter Nicholas (January 16, 2017). “Donald Trump Warns on House Republican Tax Plan.” The Wall Street Journal.
[2] Darrell Delamaide (February 3, 2017). “Opinion: Trump aide dares tell the truth: Germany exploits weak euro to gain trade advantage.” Market Watch.
[3] Dan Cancian (December 20, 2016). “FX Focus: Euro hits 13-year low against the dollar as trouble mounts in the Eurozone.” IB Times.
[4] CME Group. FedWatch Tool.
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