Gold’s rally from the December low of $1126 to $1220 has forced most of the bears out there to consider switching sides.

What appears to be a technical correction in the late December/early January time period slowly translated into a more pronounced rally. The calls for a further rise towards $1240-$1250 and even to $1270 levels have started doing the rounds.

Trump trade has run out of steam

Almost every positive thing associated with Trump Presidency has been priced-in by the markets. On the other hand, very little thought has been given to the risks associated with Trump Presidency.

What this means is market friendly news flow may receive lukewarm reaction, while even the slightest of bad news could yield a correction.

Even the Mexican Peso, often called as Trump Thermometer, hit a two-week high against the US dollar. This is surely a sign that the Trump trade has run its course; given the Peso was worst hit during the Trump trade.

Consequently, it would take massive tax cuts in US to push gold lower and/or a more hawkish Fed stance. Neither looks possible in the short-run.

Moreover, Trump is widely seen withdrawing from TPP and renegotiating NAFTA. Both moves are likely to stoke fears of global trade war…which is supportive for gold.

Thus, the only thing that could hurt gold prices in the short-run is the continuation of the record rally in the equities.

S&P500 and Gold daily chart comparison

S&p 500 and gold

  • Gold bottomed out on December 15th, while the S&P 500 index topped out around 2280 levels around the same time.
  • Since mid-December, the S&P 500 index is moving inside an ascending triangle pattern. During the same time period, gold has rallied by almost $100.
  • A bullish break in the S&P 500 index would signal continuation of the Trump rally and thus would halt the accent in gold. Moreover, in the current scenario a bullish break in S&P 500 is seen happening if Trump stops being Trump! … Gold would shed the risk premium if Trump stops being Trump.
  • However …the S&P 500 daily chart shows the RSI is losing height i.e. a bearish divergence is seen.

Daily chart

S&P500 daily

  • A bearish close below the ascending triangle support would signal a top is in place and could yield a sell-off to 2000 levels.
  • That would open doors for a rally in gold to $1250-1270 levels in the short-run.
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