Gold: What's Next?

We expect to see a battle of the various forces discussed above. For now, the market may be pricing in stronger real growth through less regulation, with a Fed able to raise interest rates as the economy strengthens. In many ways, we have seen this movie before, with the market anticipating a rate hike due to improving fundamentals.

The problem is that we have such a leveraged economy, that higher bond yields and the anticipation of higher rates may well cause risk premia to rise, i.e. volatility in the market to increase, possibly toppling over equity prices. The associated volatility may cause ‘financial conditions to deteriorate’ as the Fed likes to put it, causing them to back off from any hawkish plans. That is, the anticipation of higher real rates may fizzle out yet again, providing support for the price of gold.

And aside from higher rates being a source of market volatility, it may well be that Trump policies themselves, such as the introduction of trade barriers, may cause volatility to rise and gold to benefit.

In short, if investors believe the future is bright, with businesses increasing investments and with the Fed’s magic wand doing wonders to keep inflationary pressures just right without causing too much of a stir, gold might not rise in value.

If however, investors believe that this tug of war between the different forces will ultimately get the Fed to be ‘behind the curve,’ i.e. inflationary pressures to increase; or if investors believe the stock market might experience another bear market, then gold may continue to be a worthy diversifier.

Gold: What's Next?