Gold may face several headwinds in the remainder of the fourth quarter that could lend strength to the U.S. dollar:..
By Joe Foster, Portfolio Manager
The economic strength reported in October (for September), along with two consecutive quarters of 3% GDP growth, may indicate the economy is gaining momentum. If this continues, gold will likely remain under pressure. However since the financial crisis, economic growth has been inconsistent and below historic norms. This, along with our belief that this is a late-cycle economy, suggests we are due for some disappointments in the economy.
Gold may be negatively impacted if expected tax reforms accomplish their stated goals, namely lower taxes for the general public, elimination of provisions for special interests, and overall simplification of the tax system. Given past performance from Washington, infighting among Republicans could result in limited reforms. Also, tax reform is likely to substantially increase fiscal deficits that harm the economy in the longer term and some provisions could hamper the housing market.
The Fed is widely expected to raise rates at the December Federal Open Market Committee (FOMC) meeting. This is the third year in which the markets are anticipating a December increase. We have noticed a pattern where gold becomes oversold leading into the rate increase and rallies in the following months. During the last two months of 2015 and 2016, gold declined 7.1% and 9.8%, respectively. This was followed by gains of 16.7% and 8.3% in the first two months of 2016 and 2017, respectively.
While these headwinds may weigh on gold specifically in the near term, they also carry broader economic and financial risks. We expect the base that has formed over the last couple of years to hold firm in the $1,200 to $1,350 per ounce range.