Will We See A Replay Of 2015 And 2016 In The Gold Market?

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.

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, the market odds of such move are about 100 percent.

Third, there was a revival in the Trump’s 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 hurt safe-haven assets such as gold.

Fourth, markets also expect that the FOMC 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 world’s economy will grow 3.6 percent this year, the best result in a decade.

Sixth, the ECB 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 the Market Overview, market expectations for the ECB’s pace of tightening were too elevated.

All of these factors are likely to support both the U.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).