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Gold Jumps on Fed Rate Hike, Donald Trump Uncertainty

January 9, 2017 at 18:12 by Andrew Moran

Gold futures rose to kick off the week’s trading session as the pace of the Federal Reserve‘s rate hikes remains uncertain. This level of uncertainty, as well as the market bracing for a Donald Trump administration, helped the yellow metal revisit a five-week high.

February gold futures climbed $9.50, or 0.81%, to $1,182.90 per ounce at 16:44 GMT on Monday. The last time gold traded at this level was on November 29. This comes as gold tacked on 2.2% last week.

Silver is also rallying to begin the trading week. February silver futures surged $0.14, or 0.88%, to $16.66 an ounce. Silver was able to advance 3.3% last week as strong manufacturing news helped propel the metal.

What is driving the gold and silver rally in the second trading week of 2017? The US central bank and the president-elect.

At the last Federal Open Market Committee (FOMC) meeting of 2016, policymakers were convinced that they would raise interest rates three times in 2017, and eight to nine times over the course of the next three years. Reports now suggest that there is some uncertainty regarding the pace of rate hikes. Traders are beginning to think that the projections are too aggressive, especially considering how the US dollar is trading at the present time.

Gold is sensitive to both a rising-rate environment and a strengthening greenback. As rates move up, the opportunity cost is lifted and traders flee to yield-bearing assets. When the US dollar surges, commodities like gold and silver become too expensive for foreign investors to purchase.

Meanwhile, the market is getting ready for the incoming administration. Despite the slate of good news on the jobs front, some key market players remain cautious and often bearish about the next four years.

Here is what UBS analyst Joni Teves says pertaining to the relationship between Trump and the market:

There is an element of people taking a step back from expectations that were formed shortly after the US elections. It looks like the dollar upside has been contained.

A lot is already priced into the dollar, and the same is true for gold. People are now paring back those expectations until we get strong evidence of an acceleration in US growth, or further guidance from the new administration on what their plans are, and whether they will be able to deliver anything close to what people had been pricing in.

Ostensibly, global events, such as the elections occurring in Europe this year and further monetary easing in Europe and Asia, could prompt Fed Chair Janet Yellen to limit the number of rate hikes in 2017 to just one or two.

According to the latest data from the Commodities Future Trading Commission (CFTC), hedge funds and money managers reduced their bullish positions in COMEX gold contracts to their smallest holdings in 11 months in the week ending January 3. This is the eighth consecutive week that their positions have been cut.

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