Gold Reaches a Major Turning Point

Although the beginning of 2017 is showing a striking resemblance to 2016 from the perspective of gold and the US dollar, several developments are conspiring to change the stakes for both assets. While the fading Trump rally has left some market participants confused as to the outlook, especially with details on policy notably absent from recent speeches, recent data suggests the pace of policy tightening is set to accelerate.

Comments from key Federal Reserve policymakers seem to suggest the risks of expanded fiscal stimulus and greater deficit spending is inflationary upside, a development that would trigger a shortened time frame for additional rate hikes. With the Fed’s dual mandate already reached, additional upward momentum in consumer prices would lead to a faster pace of tightening, creating tailwinds for the dollar that could invariably sap gold’s most recent gains.

Inflation Raises Normalization Potential

A significant portion of the gains in the US dollar over the last few months can be attributed to President-elect Donald Trump’s election victory. Promises of fiscal stimulus in the form of infrastructure spending combined with comprehensive tax reform and talk of trade tariffs was enough to send the US dollar index to the highest point in 14-years. However, after reaching a new peak at the start of 2017, the US dollar has since found itself under pressure as investors question whether or not Trump can deliver on his proposals. Standing in his way is resistance from both the Democrats and within his own party.With very few details on how he plans to accomplish his ambitious goals, the dollar rally has taken a serious pause.

However, Trump is the not the only driver of the dollar and thereby precious metals. The Federal Reserve should also play an important role in the conversation considering the economic backdrop and the outlook for monetary policy. Remarks from key Fed officials seem to indicate that many are wary of the impact of fiscal stimulus, believing it will lead to higher inflation and thus necessitate a faster pace of rate hikes. Classically, the US dollar benefits from policy tightening in the form of rate hikes, suggesting that despite a correction from the most recent rally, there remains significant upside potential considering anticipation of three hikes during 2017.

Now that headline inflation has crossed the Federal Reserve’s 2.00% target, the path for successive rate hikes may now be clear. Consumer prices, which remained under pressure over the last two years following the steep decline in energy prices, are rebounding higher with both the headline and core figures trending above the Fed’s mandate. With near full employment, the Fed has few obstacles to raise rates. As a result, the dollar is poised to see additional momentum higher over the medium-term as other advanced economies remain in accommodative policy mode. This likely upside in the US dollar will foreseeably pressure gold prices lower, especially if the inverse relationship between the two assets strengthens over the coming sessions.

A Stronger Dollar Will Sink Gold

In spite of the fact that gold is traditionally a stronger hedge against inflation and general uncertainty, both of which are in ample supply heading into the Presidential inauguration later this week, a stronger dollar is likely to reverse recent gold momentum. When it comes to defining the current state of interaction between the two assets, the current correlation coefficient of -0.9400 implies a very strong inverse relationship, suggesting that as the dollar falls, gold will rise and vice-versa. However, now that inflation has come out as broadly in favor of additional rate hikes, the dollar may begin to reverse, pressuring gold prices lower over the medium-term after a significant rally over the last four weeks.

Adding to the more bearish outlook for gold prices are technical momentum indicators which are either trending in or just shy of overbought territory. The Stochastic Oscillator is current trending above the 80.0 overbought threshold which suggests a pullback may be in order, while the Relative Strength Index trending just shy of the 70.0 level indicates upside momentum may be overdone. Even though gold prices could continue to climb, major resistance appears at $1250. However, it coincides with the 200-day moving average, implying that significant momentum would be needed to overtake the level. Any correction from current prices would first find support at $1200, before retesting downside support at $1125.

What Binary Options Traders Should Watch For

The major developments that investors should be conscious of in the days and weeks ahead are details on fiscal policy plans and any hints of a shortened timeline for interest rate increases.Speeches from Federal Reserve Chair Janet Yellen and incoming President Trump have a strong tendency to result in out-sized momentum and volatility in financial markets.Friday’s speech from Trump at the inauguration will likely be an important event not to miss. Nevertheless, apart from policy commentary, the last major data point to be released ahead of the February 1st FOMC Meeting is the GDP figures from the fourth quarter.An upbeat result will likely help fuel additional dollar upside, gradually leading to fading gold prices.