The US dollar has a good track record in the December quarter, rising in eight of the past 12 years.
And with the US dollar index up 1.6% since the end of September, it looks like it may extend that record to nine from 13 should the current trend be maintained.
For assets priced in US dollars, this presents a headwind, including the spot gold price.
After rising close to 18% between January to early September, the gold price has come under renewed selling pressure recently, falling by around 6% from the high of $1,357 an ounce struck on September 8.
The stronger US dollar, along with a perceived decline in geopolitical concerns surrounding North Korea, go someway to explaining its recent reversal.
According to analysts at Macquarie Bank, there may be further downside pressure to come, continuing the pattern seen in 2015 and 2016.
“In both 2016 and 2015, the [December quarter] went something like this. Gold sold off as the dollar rallied on the back of rising US yields as expectations firmed of a Fed tightening,” it says.
“Much the same seems to be happening in 2017. If history was to continue to repeat itself then the gold price looks vulnerable.”
These four charts from Macquarie show how higher US bond yields and dollar weighed on the gold price in late 2015 and 2016, along with the similarities seen this year.
Macqaurie says building rate hike expectations in the US, leading to a pickup in US two-year bond yields, will probably result in a “Groundhog Day” scenario for the gold price again this year.
“Our macro view is history will repeat itself, though not exactly,” it says.
“We expect the Fed to raise rates in December, though we are less confident the dollar will continue to rally.”
Adding to potential downside risks, Macquarie says elevated long speculative positioning in gold futures, shown in figure four, is another vulnerability for the gold price in the months ahead.
While it says further downside is likely in the near-term, it attaches several caveats that could either exacerbate or reverse recent price weakness.
“Short-term there are still plenty of potential gold positive flash-points, but also some negatives, the most obvious of which is the prospect of a US tax bill finally being passed. And so far issues such as in Korea or the Middle East appear to have given gold only fleeting support,” it says.
Longer-term, it’s also worthwhile noting that US bond yields have often reversed course in the first quarter of the new year, contributing in some instances to modest US dollar weakness.
And, as Macquarie points out, this has also acted to support the gold price in both of the last two years.