2. Gold is mostly tied to the U.S. dollar
The reason why gold gained more than 12% in 2017, despite an unpleasant macroeconomic environment for the precious metals, was a weak greenback. The broad trade-weighted U.S. Dollar Index fell from 128 to 120, or more than 6 percent. Real interest rates are also an important driver of the price of gold, but the correlation was significantly stronger with the greenback in 2017. And the level of yield of the inflation-protected 10-year Treasuries at the end of the year was similar to the level at the beginning of the year (about 0.5%). The conclusion is clear: the decline in the U.S. dollar’s value clearly supported the yellow metal during the last 12 months. It is not surprising given the fact that gold is a bet against the greenback. Hence, the key to gold’s future is the U.S. dollar. We will dig into the outlook for the greenback for 2018 in the upcoming edition of the Market Overview.