Elevated geopolitical risks and expectations that the Fed will only raise interest rates slightly this year and next have buoyed the price of gold. While we have revised up our end-2017 forecast to reflect heightened global risks, we are wary of being overly bullish on prices for three reasons. First, we think that markets are underestimating the scale of Fed tightening. Second, the unwinding of QE in the US could be negative for gold. Third, the gold market might be overreacting to geopolitical risks.
To recap, after falling to a low of $1,127 per ounce in the aftermath of President Trump’s election, the price of gold has since surged, breaking above $1,300 this week. At first glance, it would appear that expectations for US monetary policy have been the main driver of this year’s rally in prices.
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