On Thursday, the price of gold dropped 1.5 percent. What does it mean for the gold market?
Yesterday, gold fell below $1,260 and continued declines today in Asian trading hours. Was not it supposed to rise to $1,850 if Trump wins? Well, such predictions were unrealistic from the very beginning, but a modest bullish reaction could be reasonably expected.
Why is the price of gold going south? It seems that markets have second thoughts after Trump’s victory. The initial surge during the election evening resulted from a popular traders’ approach: sell first and ask questions later. Investors digested the outcome and they apparently discovered that Trump is not a fascist monster (as he was painted sometimes by the Democrats) and the world will not end. Actually, although the uncertainty about the upcoming policies of the new U.S. president is still present, and some of Trump’s ideas are harmful for the economy, investors focused on his pro-growth proposals.
We will describe Trump’s program in more detail in the upcoming edition of the Market Overview, but in short he is likely to cut taxes and increase spending. In a victory’s speech Trump mentioned boosting infrastructure investments, which was apparently warmly welcomed by financial markets… with the exception of the gold market. Why? Well, the fiscal stimulus implies that monetary policy could be tightened more quickly. Indeed, Richmond Fed President Jeffrey Lacker said yesterday: “If a fiscal stimulus initiative were enacted I think we would see a steeper path of rate increases”. Moreover, Lacker added that the outcome of the election had not altered the case for a December hike: “The case for raising rates is relatively strong. I continue to believe that's the case even with the events of this week”. As the focus gradually shifts towards the next Fed meeting, which is expected to be hawkish, gold may be again under downward pressure.
Summing up, the price of gold declined 1.5 percent on Thursday. It seems that the dust of the election settled and the investors’ focus shifted again towards the prospects of a Fed hike. Although Trump’s detailed agenda is not yet known and some of his proposals are negative for the economy, the call for fiscal stimulus was welcomed by the markets and by the Fed officials as it could neutralize the contractionary effect of the rate hike. The unaltered strong case for a December hike, or even a steeper path of rate increases, is bad news for the gold market.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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