Gold Prices Are Up 9% This Year. Is This Rally Sustainable?

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: MetalMiner

Original Post

By Raul de Frutos

Gold prices have gained 9% this year, regaining much of the losses seen after the U.S. presidential election.

A stronger dollar and expectations for economic growth drove investors out of the safe haven asset. What's now sending investors back into gold? And is this rally the beginning of gold's revival or just a dead cat bounce?

Buying The Dip

Gold rises in 2017. Source:MetalMIner analysis of @stockcharts.com data

Although a 9% increase might look impressive, it really isn't. The metal previously lost $180 per ounce in less than two months. After such a big slump it's normal see a price rebound, since many investors will see the significant dip as an opportunity to buy gold at a discount.

To me, this doesn't mean gold's underlying fundamentals have improved. Prices still have yet to test stiff resistance near $1,300 per ounce. This rally could lose steam in March.

The US Dollar

The US Dollar Index since March 2016. Source: MetalMiner analysis of @stockcharts.com data

Perhaps the single factor contributing most to this year's gold rally is a weaker dollar. Weakness in the dollar also comes because the currency rose very fast in the last quarter of 2016. In addition, President Donald Trump made comments that he desires a weaker dollar, and that has also weighed down the currency.

Last week, Federal Reserve officials said they plan to raise rates "fairly soon," but they left investors doubting that the central bank will act at its March meeting. The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017. Higher rates tend to weigh on gold, since the precious metal becomes less less attractive compared with yield-bearing assets when borrowing costs rise.

This month, the dollar seems to be finding some support. We'll have to wait and see if the currency can resume its bull market run, which would be quite bearish for gold prices.

Stock Markets

The S&P 500 hits all-time highs. Source: @Stockcharts.com

Trump has frequently told U.S. citizens he remains committed to both tax reform and regulatory cuts since entering the White House, which has created optimism among investors. We already presented the case for a bull stock market back in January.

A Trump administration for the next four years might be just what the doctor prescribed to keep this aging bull stock market going, even with seven-plus years of gains behind its back. At least that's what it looks like thus far. U.S. stock indexes are trading at all-time highs, which is not helping gold as a safe haven.

What This Means For Metal Buyers

The recent strength in gold prices is something to keep an eye on. However, keep in mind that this rally might just be a dead cat bounce. A rising stock market, a healthy U.S. dollar and gold prices meeting resistance are factors that could keep a lid on gold's rally.

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