The dust has started to settle since the news of Donald Trump’s win, and it is time to explore what this will mean for the future of gold. The presidential office is one of the highest, most respected seats a person can hold, giving power and influence, and shaping the laws and policies of the country. In the aftermath of the US election surprise, gold prices have been in a significant retreat as the US dollar has surged, global equity markets have stabilized and strengthened, and interest rates are increasingly expected to rise.
The United States Presidential election has had a very big influence on gold. Before the election, it was predicted that, while a win from either candidate would benefit gold prices, for Donald Trump, the results would be more extreme. A Trump win was seen to be politically and economically disruptive, leading to fear, and a more volatile market. And while the markets did react strongly to the new president-elect, it was not nearly as striking as expected. On election day, gold prices surged from below $1,280 an ounce to more than $1,337 an ounce at one point. Gold futures had their heaviest-ever trading day on Wednesday as investors rushed to safe-havens. More than 780,000 gold futures changed hands in the wake of the news. It seemed that the suppositions surrounding Trump and the market was correct, until things began to shift again. Gold futures for December delivery reversed course late Wednesday to settle slightly lower at US $1,273.50 an ounce on the New York Comex on Thursday. In his victory speech, Trump proposed a “$1 trillion over a 10-year period” infrastructure plan, which has already boosted the price of metals in the last week.[i] Gold futures pared much of their earlier losses on Monday following their biggest weekly lashing in over three years, but prices still finished at their lowest levels in more than five months. Gold futures for December delivery GCZ6, +0.35% fell by $2.60, or 0.2%, to settle at $1,221.70 an ounce.
Trump’s economic policies have left many investors unsure for the future due to his lack of political experience, lack of clarity as to what parts of his platform would be pursued, and unknown political appointments for his Cabinet. Trump ran on an economic platform that supports cutting corporate taxes, repatriating money from abroad and massive infrastructure spending. This would suggest a more inflationary environment that would be supportive to gold and other precious metals. A bond-market gauge on Thursday hit its highest level since the summer of 2015. The 10-year break-even inflation rate indicated expected annual inflation of 1.89% over the next 10 years. That measure, reflecting the gap in yields between Treasuries and their inflation-protected counterparts, known as TIPS, was 1.73% following the election.[ii] On Monday, the yield on the 10-year Treasury note rose to 2.29%, its highest since the beginning of the year. The 30-year yield increased as much as 13 basis points to 3.06 percent.
Trump’s victory had initially cut expectations that the Federal Reserve would raise interest rates in December. The Fed meeting, taking place December 13th and 14th, is now getting higher predictions of a rate change. The dollar has advanced amid rising inflation expectations in the wake of Trump’s election win and strengthening predictions for a Federal Reserve interest-rate increase next month. The dollar index, which measures the dollar against a basket of major currencies, fell 0.18 percent to 98.607 on Friday.[iii] On Monday, the U.S dollar climbed against foreign currencies. The U.S. Dollar Index rose 1.1% earlier in the session, hitting its best level since November 2015. The U.S. dollar rose 1.3% against the euro, 1% against the British pound, and 1.6% against the Japanese yen. Gold prices fell as the U.S. dollar climbed. Trump has spoken out against the Federal Reserve, and their policy of holding interest rates near zero, and this could be indicative of a monetary policy shift. Gold is highly sensitive to rising rates. Higher rates lift the opportunity cost of holding non-yielding assets, such as bullion, while supporting the dollar, in which it is priced. Trump has expressed interest in the return to the gold standard, which would tie the U.S. dollar to bullion as a hedge against inflation. While this may have just been a campaign stance, it would greatly affect the price of gold if it were to be instituted.
Trump’s foreign policy will be greatly influential in gold pricing. There are several speculations pertaining to the impact of U.S relationships with Mexico, China, and Russia. Trump has been a staunch critic of global trade deals. He has labeled China as a currency manipulator, and he has spoken to policy that could break down long-standing geopolitical relationships throughout Asia. Trump has campaigned on limiting Mexican imports. After Trump’s win, the Mexico peso experienced losses, with a fresh record low over 21 pesos per dollar, and some forecasting further declines.[iv] On Sunday, Trump backed away from his promise to erect a border wall, saying some areas could instead be “fencing”.[v] In wake of the softening stance, Mexico’s peso jumped as much as 1.1 percent Monday.
With almost two months until the 45th United States President is sworn in, there is going to be a lot of speculation. Gold prices will be seen to reflect the sentiments and fears of investors. There is a good possibility that Trump’s victory, and his impending time in office will spark demand for physical gold. So far this year, physical gold demand has disappointed. Earlier in the week, the World Gold Council reported that gold demand dropped by 10% to 992.8 tons in the third quarter of 2016. Predictions have reported that a hit to risk sentiment and fears over free-trade deals would drive gold higher in the coming months, with the price hitting $1,400 or even $1,500. Only time will tell.
[i] http://www.cnbc.com/2016/11/15/gold-set-to-get-a-boost-as-president-elect-donald-trumps-spending-plans-fuel-inflation.html
[ii] http://www.wsj.com/articles/donald-trumps-win-fuels-bets-on-inflation-1478821303
[iii] http://www.bloomberg.com/news/articles/2016-11-08/gold-holds-drop-with-investors-on-tenterhooks-before-vote-result
[iv] http://www.nytimes.com/2016/11/10/business/dealbook/mexico-peso-dollar-election-trump.html?_r=0
[v] http://www.reuters.com/article/us-mexico-peso-idUSKBN1380V5
