By Amrith Ramkumar
Gold rallied 14% in 2017, the best annual performance since 2010, as a weakening dollar and political tensions around the world helped lift prices.
The gains are striking given how U.S. stocks soared last year, and cryptocurrencies like bitcoin became more mainstream -- potentially stealing investor dollars away from bullion. On top of it all, the Federal Reserve raised interest rates three times in 2017. When interest rates rise, gold often struggles to compete against yield-bearing assets like Treasurys.
But jitters over a mix of market risks prevailed, buoying gold prices throughout the year. Now, as investors decide where to allocate money in 2018, one of the biggest questions for gold is whether the Fed will stick to its plan of raising rates three more times this year.
"The Fed is a bit of a cipher for the first time in some time," said Tai Wong, head of metals trading at BMO Capital Markets.
Interest-rate concerns kept gold in a tight trading range late in the year. The precious metal stayed in a trading range of $34.50 during November, the lowest gap between its high and low in any month since October 2005, according to WSJ Market Data Group.
Still, many investors are eyeing inflation figures and are unconvinced the Fed will actually increase rates three more times in 2018, CME Group data show. Roughly 60% of traders tracked by the exchange group expect two or fewer rate increases.
Adding to the uncertainty, Fed governor Jerome Powell is set to succeed Chairwoman Janet Yellen in February. There are also multiple other vacancies on the central bank's board of governors. Some analysts think a combination of changes in membership and economic data could shift the Fed's policy, pushing gold out of its recent trading range -- in either direction.
Mr. Powell is "likely to also move cautiously, but central banks can surprise you," said Mr. Wong.
Some analysts also said gold's banner year in 2017 was a function of its starting point, as the precious metal tumbled in December 2016 following the U.S. presidential election.
Mr. Wong said the falling U.S. dollar and a strong performance across commodities helped support prices.
Because gold is a dollar-denominated commodity, it becomes cheaper for overseas buyers when the U.S. currency grows weaker. The WSJ Dollar Index, which tracks the dollar against a basket of 16 other currencies, fell 7.5% last year, its worst annual performance since 2007.
Investors and analysts will be closely monitoring moves in the dollar. The U.S. currency has rebounded slightly from its September multiyear lows.
Still, the precious metal climbed in 11 of the last 12 trading sessions of 2017 as the dollar fell. Gold closed the year above $1,300 -- a key technical and psychological level for many investors.
"We continue to think as a small weight for individual investors that gold can be a good thing to diversify," said Craig Birk, executive vice president of portfolio management at Personal Capital.
Numerous political events throughout last year stoked fear that the gains across many financial markets could be upended. Tensions between the U.S. and North Korea ramped up, with North Korean leader Kim Jong Un ordering missile launches in July, September and November.
Concerns also flared up about Catalonia's push for independence from Spain, Iran's test of a new medium-range ballistic missile in August, and President Donald Trump's granting of U.S. recognition to Jerusalem as the capital of Israel in December.
Doubts about the Trump administration's ability to push its agenda through Congress and a probe of Russian meddling in the 2016 presidential election also fueled investor worries.
"Gold has been unbelievably resilient given everything that's being thrown at it," said Mark Lacey, head of global commodities and resource equities at Schroders.
Mr. Lacey said the firm is overweight gold in its commodity fund. Investors are taking small positions in gold as a hedge going into 2018, he said.
He expects the Fed to be cautious about raising interest rates, helping supporting gold prices. However, he also said, central-bank policy "is always a risk."
Write to Amrith Ramkumar at email@example.com