The US Economy Is Running Red Hot and Gold Is Persona Non-Grata

The S&P 500 index is currently trading at 2,392.23, up 6.85% and 16.86% over the course of 1 year. The 52-week range topped out at 2,400.98, with a low of 1,991.68. For binary options traders, all these numbers may seem irrelevant to the price of gold bullion, but they are extremely pertinent. For starters, the S&P 500 index is a reflection of the performance of the US economy. When the S&P 500 index is at 52-week high levels, it means that investors have adopted a risk-on approach to equities markets. Further confirmation of this is evident in the current levels of the Dow Jones Industrial Average (21,022.54), and the Nasdaq composite index (6,030.69). Traders tend to invest their money where it generates the most returns. For now, a risk-on approach to equities is back in favour. This means that less capital is being directed at safe-haven assets such as the Japanese Yen, Treasuries, and gold.

What Factors Are Driving down the Price of Gold?

The nominal price of gold is largely irrelevant for a binary options gold trader. What is important is the direction of price movement of the precious metal. Recent geopolitical events have spooked investors, and this led to a surge in gold demand. For example, the French presidential elections had everyone on tenterhooks. Far right candidate, Marine Le Pen made it through to the second leg of the elections, but she is behind in the polling. The centrist, Macron is in the ascendancy.

The Euro Zone is in all sorts of trouble. On the one hand, we have Britain on the cusp of an ugly Brexit, and now we have a populist leader in France who is pushing a far right agenda. Nationalist politics does not embrace multilateralism, and that’s precisely what the EU is founded upon. In the run-up to the French election, pundits were concerned that Marine Le Pen would gain the ascendancy. While she’s not out of contention for the presidency yet, polling suggests that she will not win the popular vote. Thus, traders have eased up on safe-haven assets like gold.

Then of course there is the Fed to consider. As the world’s biggest central bank, the actions of the FOMC determine the strength of the USD. No single monetary authority has the clout of the Fed, and binary options gold traders should watch Janet Yellen and other FOMC announcements carefully. The federal funds rate is currently around 1%. There are at least 2 additional rate hikes slated for 2017, which should bring the FFR towards the 1.50% range before the end of the year. This typically increases demand for the USD, which then decreases demand for gold. Gold is denominated in dollars and does not offer interest-related returns. There is an opportunity cost to holding gold when interest rates are high.

For Now Europe is Safe…

But what about North Korea? This remains a proverbial thorn in the side of Western nations. That the Trump White House summoned the Senate for an emergency briefing on North Korea is cause for concern. However, Pyongyang has oftentimes made bellicose threats against the US. Gold remains a viable proposition as long as there is geopolitical tension vis-à-vis North Korea. For the short-term however, the calm that has descended across the Euro Zone and major European indices like the FTSE 100 index, CAC, DAX, IBEX and others indicates that there is less concern and less desire for the precious metal.

Of course, as we get closer to May 7, we will have a better idea of where the French presidential election is headed. Any swing towards Le Pen will weaken the EUR, strengthen the JPY, GBP and USD, and send European bourses lower. Gold will come out on top in that scenario. If Macron gains the ascendancy, Europe will breathe a collective sigh of relief and gold demand will wane. It’s not only gold that will bear the brunt of increased political stability in Europe, it’s silver, the JPY, and gold ETFs as well. Trading experts deem gold a buy over the long term, but short-term price movements are certainly bearish.