Gold Hits 6-Week High: Further Gains Expected Lombardi Letter 2017-01-11 12:15:20 goldgold pricesprecious metalsDonald Trumpbrexit Gold prices are at a six-week high, and further gains are expected, with growing concerns about Brexit and uncertainty about Donald Trump’s trade policies. Commodities

Gold Hits 6-Week High: Further Gains Expected

Commodities - By John Whitefoot, BA |
Gold Prices

Gold Climbs as Dollar Weakens and Brexit Reigns

In a scene reminiscent of January 2016, gold prices have come out of the gate in a bullish manner in 2017. Gold prices are at their highest level in six weeks, exchanging hands at $1,189.80 per ounce, the highest level since November 29, 2016. Since the start of 2017, gold prices have advanced 3.3%. Gold prices are also up 5.8% off of the December lows near $1,124 per ounce.

There are a number of reasons why gold prices have rebounded. First, gold prices have been helped by a weakening U.S. dollar. The U.S. dollar has been down for much of the week on the heels of mediocre jobs data. Any action on the U.S. dollar will be muted for the remainder of the week, with no meaningful economic data being released, and five Federal Reserve speakers taking the stand on Thursday.

Gold bullion is also getting a boost from growing fears about political uncertainty over Britain’s future ties with the European Union (EU). As a hedge against economic uncertainty, investors are turning their attention to gold after British Prime Minister Theresa May said last weekend that she was not interested in keeping “bits” of its EU membership. This has led many to believe that Britain is headed for a “hard Brexit.” (Source: “Brexit weekly briefing: May unclarifies strategy as EU converges,” The Guardian, January 10, 2017.)

“People voted to leave the EU but also voted for change,” said May. “This year is the year we start to make that happen.”

Many economists believe that membership in the single market is crucial for Britain’s economy. This might be difficult in light of the fact that May also said Britain will “have control of our borders, control of our laws.”

Even if Britain does go for a clean break with the EU, the divorce could come with a hefty alimony payment. Britain could be hit with a £50.0-billion “exit bill” by the EU as soon as Theresa May triggers Article 50. The U.K. could be on the hook for tens of billions of dollars it must pay into the EU budget until 2020. An extra £50.0 billion may not sound like much to the quantitative easing-happy United States, but it could be an added millstone around the country’s neck. (Source: “Britain will be handed £50bn exit bill by EU when Theresa May triggers Article 50, chief negotiator for Brussels warns,” The Telegraph, December 16, 2017.)

Precious Metals Bulls Eyeing Trump

Incoming President-elect Donald J. Trump is also stoking safe-haven buying. Sure, expectations are high that Donald Trump’s economic policies will boost U.S. growth and corporate earnings, but investor confidence may be too high. It’s quite possible that many investors have decided it might actually be a good idea to take a step back, and wait to see if Trump’s economic policies actually work.

How will Donald Trump’s trade policy impact the country’s relationship with key trading partners like China, Canada, Mexico, Japan, and Germany? Was Trump a little premature sidling up with Taiwan?

Until Trump’s policies come more into focus, the U.S. dollar and bond yields will continue to waiver. Gold prices on the other hand, should experience solid gains.

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