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Gold: Always Believe?

Port in a storm. Call it coincidence but gold prices have been trending upwards since the January inauguration of President Trump, ending last week at around $1250/oz, up around 10% since the start of this year.

2017 Outlook. Much of the recent upswing reflects the weaker US dollar alongside the broad pickup in inflation rates, especially in the US where CPI inflation is close to the 2% target. Thus, if the USD were to continue to weaken and US inflation tick above the target then a continued rise to around $1300/$1400 by the end of the year is plausible. However, both developments, in particular a sharp above-target jump in inflation that fed through to price expectations, would increase the likelihood that the Federal Reserve raises US policy rates more aggressively than its central expectation of one more hike in H2. If the Fed were to lean to the upside with two more hikes this year then the expected pass through to the USD could push gold prices down towards $1100. However, at the moment the odds are firmly tilted away from this possibility.