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The Federal Reserve’s decision to raise interest rates on December 14 should have been the death bell for gold, a commodity that is highly sensitive to monetary policy. But something very strange is happening to bullion: not only has it strengthened in the wake of the Fed’s decision, it has done so despite a stronger U.S. dollar. Conventional wisdom suggests this shouldn’t be the case.

Gold futures are up nearly $100, or 8.3%, since the December 13-14 Federal Open Market Committee (FOMC) meeting. All other things being equal, the last two rate hikes should have been bad for the yellow metal. That’s because rising interest rates motivate investors to move capital to the U.S. This pushes up the value of the U.S. dollar in which gold and other precious metals are denominated. Since these metals do not pay interest, the opportunity cost of holding them is higher when rates rise.

Gold’s resilience over the last three months can be partly explained by Donald Trump’s surprise election win. Trump has vowed to stimulate economic growth through a cocktail of unproven policies that could have unintended consequences for the world’s largest economy. The new administration has also taken a decidedly protectionist approach that many investors fear could undermine global trade flows. Trump has already backed out of the Trans-Pacific Partnership (TPP) and ordered a review of the North American Free Trade Agreement (NAFTA). These policies have fueled anxiety about the global economy, making gold and other risk-off assets more attractive for investors.

A lack of clarity about Trump’s economic policies may have been one of the leading causes to fuel risk aversion in the financial markets. Although Trump has promised “phenomenal” tax reform and called for a formal review of key financial regulation, the new administration has yet to provide a concrete plan on how it will stimulate the economy.[1]

However, the new U.S. administration isn’t the only source of geopolitical uncertainty. Elections in France, the Netherlands and Germany are looming, provoking concerns about the rise of populism and the future of the European Union. As investors seek a haven from political uncertainty, gold will continue to offer value.[2]

Gold isn’t the only metal in the midst of a prolonged uptrend. Silver prices are also trading at three-and-a-half month highs, having gained more than 15% since the start of 2017. This has pushed gold’s relative value to silver sharply lower in recent months.

After stumbling at the start of the year, the U.S. dollar has also regained momentum in recent weeks. This included a streak of ten consecutive gains through the first two weeks of February. Those gains failed to erode confidence in gold, which continues to stand firm.

That being said, gold’s upward trajectory could still run into resistance in the second quarter should the Fed raise interest rates again. Markets expect a third interest rate hike by June, according to 30-day Fed Fund futures prices.

[1] Robert Schroeder (February 9, 2017). “Trump says ‘phenomenal’ tax announcement coming in weeks.” Market Watch.

[2] Eddie Van Der Walt (February 19, 2017). “Gold Isn’t Behaving in Practice The Way It Should in Theory.” Bloomberg Markets.

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