What Is The Short-term Direction Of Gold?
Gold is currently trading at $1,257.16 per ounce (February 26, 2017). The gains enjoyed by gold resulted in a solid finish to the week. As one of the world’s most-watched commodities, gold prospers when all else is failing. It is the perfect hedge against stock market volatility, and this is precisely why we are seeing renewed interest in bullion at this time. There are growing concerns that Wall Street is overpriced and overbought. This naturally lends itself to fearmongering among speculators. The gold price is now trading close to 4 month highs and this is the clearest sign that nerves are getting rattled.
While it is true that Trump’s election to the Oval Office was bad for gold and great for Wall Street, there is a reversal of sentiment taking place. Whenever indices rise too quickly, concerns begin to mount. The Dow Jones is up 3.62% for the month, the S&P 500 index is up 3.17%, and the Nasdaq composite index is up 3.26%. Over 1 year, these indices are up 21.52% – 27.34%. This is largely being driven by speculate of sentiment, not fundamentals. And the gold bugs are all too aware of this.
Precious Metals Are Surging
Any time markets rise too sharply in too short a period of time, there is always the fear of a correction or reversal. This would entail a 20% pullback in the markets. Such a sell-off would result in trillions of dollars being wiped off Wall Street, and the domino effect would be catastrophic on global equities markets. Since Trump took office, Wall Street has rallied tremendously. His proposals to slash corporate and personal income taxes in the region of 15% – 20% are perceived as major fiscal stimulus measures. Additionally, Trump wants to embark upon an aggressive policy of fiscal expenditure.
This would see billions of dollars being pumped into the US economy to rebuild infrastructure, create jobs, and return industry and ingenuity back to the US. These measures are positively perceived by equities markets, but Trump is light on substance. The gold price is $1,258.30 per ounce on the Comex, up 0.55% or $6.90 per ounce. The spot gold price is a little lower at $1257.19, up 0.61% or $7.63. Gold began its decline on 3 November 2016 when it was trading at $1,302.70 per ounce, and it dropped to $1,128.50 per ounce on 15 December 2016. Since then however, the price has been consistently rising, with further upside potential in the offing.
How Should Binary Options Traders React to the Current Gold Market?
There is an inverse relationship between the price of gold and the US dollar. As the dollar strengthens, so the price of gold declines, and vice versa. As treasury yields continue to move lower, we can expect the price of gold to rise. Inflation targets are now moving sharply higher given that oil prices are also trading in the mid-$50 range. Recall that OPEC countries agreed to a production cuts in the region of 1.2 million – 1.8 million barrels per day. This takes a huge chunk of oil off the markets, pushing demand and supply closer together. As inventory levels run down, the price for WTI crude oil and Brent crude oil is going to rise. This lends itself to higher expected inflation.
As more money chases too few goods, the inflation rate will rise above the Fed’s 2% objective and this will weaken the USD and boost demand for gold. But if the Fed acts anytime soon, we could see the USD rally and this would be bad for gold. As a gold trader, watch out for the Fed’s FOMC updates on March 15. Also, keep your eyes on the gold price/inflation correlation. US equities weakness and dollar weakness are good news for gold.
Disclosure: None.
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