Background

This year gold’s fortunes will be influenced by the actions of the Central Bankers and the Geo-Political chaos which is simmering in various parts of the world. We are all aware that there are many factors that influence the precious metals sector; however, today we will only look at these two as I believe they are the dominant factors.

Central Bankers

Janet Yellen’s speech on Friday referred to possible rate hikes being implemented sooner rather than later as economic conditions would appear to have improved. Also, note that inflation had popped above 2% for the first time in 2½ years which can be construed as an additional reason for the Federal Reserve to lift interest rates progressively this year.

The market is now pricing in a 50%plus chance of a hike at the next FOMC Meeting being held on 14th/15th March 2017. This action has the ability to boost the value of the US Dollar and as gold has an inverse relationship with the dollar then we would expect gold’s progress to be hampered if not reversed. The rate hikes can have a long lasting effect or they can be short lived, a lot depends on the rhetoric surrounding them; if it sounds as though we are to expect two or even three hikes this year then gold will come under pressure. However, if we are to remain ‘data driven’ and there is nothing conclusive regarding further hikes, then gold may take this one off hit and then resume its trek north. For example in December 2015, gold dropped 2% of its prior to the hike and but then recovered and put on 2.6% during the month following the hike. So we might have seen the worst or gold may suffer a tad more, we won’t know until the 15th march.

Other central bankers may wish to follow the Feds moves; however, their economies may be too fragile for such a tightening of monetary policy to be considered. At the moment the hiking of rates would appear to be the sole preserve of the Federal Reserve.

The Fed speak in recent years has been falling on death ears as the Feds credibility has been severely dented by suggesting one thing and doing another. The next seven days or so could set the stage for a new phase in terms of US monetary policy, something that gold bugs like me cannot ignore.