Financial Analysis of Gold Market – June 2017

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Gold barely moved in the month of May, having gone down by half a percentage point. But if we look under the hood, gold has had an active month and it seems to just be getting started. In less than 15 days, the U.S. Fed will reach a decision about raising interest rates and could announce another quarter point increase. As of May 30, 2017, chances of the Fed raising interest rates stood at 88%. Although it is important to mention that during the market sell-off that occurred two weeks ago, those odds were down significantly to slightly above 60%. As we know, if the markets become volatile over the next two weeks, the June rate hike could be off the table altogether, thus making it a very bullish environment for Gold.

Bubble size represents market cap

FIGURE 1: PERFORMANCE OF GOLD MINERS

Description: Figure 1 highlights the performance of the gold mining industry for the month of May 2017 (x-axis) and the performance of the 11 months prior to May 2017.

Whether the Fed raises interest rates or not, Gold will perform well. Previous rate hikes have caused mild sell-offs, however, this has mostly been a “sell the rumor buy the news” type of event. Gold often rallies following a rate hike, just as it did after the Fed’s March 2017 rate decision.

Although markets seem to always perceive rising interest rates as a negative for gold, as long as inflation is present in the economy, historically gold has done well in rising rate environments. Recent economic data such as the CPI, PPI, and wage growth suggest that inflation is averaging ~2.5% over the past few months, making it the highest rate of inflation we have seen in the past five years in the U.S. The last time inflation approached these levels was in 2010 and gold shot up ~150% and silver ~400%. If inflation continues to stay at these levels, we could end up seeing a big run up in gold, silver, and their related derivatives.

At the same time, the continuing political uncertainty surrounding Trump, democrat opposition, investigations, scrutiny, and ambiguity along with other factors are proving to be difficult for the administration. Some political analysts believe that Trump’s proposed tax cuts and infrastructure spending may not occur, and even if they do take shape in some form, it could be a long way down the road. If Trump’s agenda isn’t implemented as proposed, seeing that markets have priced in the proposed tax cuts and infrastructure spending already, gold could see a strong run up in light of the future of the U.S. leader.

While the situation concerning North Korea has quieted down in recent weeks, it is far from resolved. Simultaneously, U.S. relations with its allies in Europe and the rising political uncertainty in the U.K.’s upcoming elections have spurred increased safe-haven demand. The metal, often seen as an alternative investment during times of political and financial uncertainty is benefiting from a risk-averse mood in global markets.

Regardless of what the Fed chooses to do, the political, technical, geopolitical, and inflationary, factors warrant gold will sustain its uptrend, helping push prices higher.