Gold has traditionally been seen as a hedge against political uncertainty, but in recent years the metal hasn't performed in this capacity. This underperformance is due to dollar strength and an increase in bond yields resulting from, well - political uncertainty.
When Donald Trump was elected, many investors got nervous about holding U.S bonds. So the price of these bonds fell, and as a result, their yields went up. Gold prices were pressured downwards because the metal trades inversely to bond yields. However, it seems like things are about to change. Data from the U.S housing market suggests the American economy may not be as strong as previously expected. Economic weakness may lead the Federal Reserve to dial back its hawkish interest rate plans for 2017 bringing the dollar down from its historic highs.
Catalysts for Dollar Weakness
Dollar strength predicates on two things: The expectation of further rate hikes in 2017, and the lack of substantial rates in Europe and Japan. If the U.S economy weakens, the Fed will not raise rates further. And as a result, the dollar will correct downward. A collapse to 2014 valuations could send gold prices soaring.
Geopolitical Challenges
On top of the currency issues, the world faces numerous geopolitical challenges going into 2017. Tensions between the United States and China intensify in the Pacific region, and relations between the United States and Russia are frostier than usual.
In addition, the United Kingdom is yet to feel the full impact of Brexit. The political climate all across Europe is tense, with populist movements threatening the survival of the European Union. On top of this, struggling banks in Southern and Eastern Europe put the global economy at risk.
Conclusion
Weak economic data puts the U.S Federal Reserve's interest rate plans into question, and give support to gold. If the U.S dollar falls in 2017, the powder keg of geopolitical uncertainty is likely to result in significant upside for gold investors in the coming years.
