With the uncertainty hanging over the U.S. Presidential race now dispelled, we enter the period of uncertainty that surrounds the prognosis for economic, financial and political policies that will characterize the next Administration. The GFMS team at Thomson Reuters considers the markets’ reactions thus far and looks ahead to what may lie in wait for gold.
Gold finds sellers into early strength, but should become a buy-on-dips market
First: the immediate market impact as the result became clear.
U.S. equities futures traded limit down, implying a 5% fall at the opening of the markets in the United States
The CBoE VIX index (sometimes referred to as the “Fear” index) rose by 40%
The Mexican peso plummeted by over 13%, taking silver in local terms to test the high that has been posted twice this year already, back at February 2013 levels. Mexico is the world’s largest silver producer with 21% of world mine production.
Gold initially added $45 at its peak to reach $1,337, a gain of 4.3% against the LBMA Gold Price PM for the previous day.
In the major gold producers’ currencies, this represented a three-month high in renminbi, and seven-week highs in Australian dollars, roubles and U.S. dollars (which four countries account for 38% of 2015 world mine production).
Then: - calmer waters
This all happened during Asian hours, when, as one analyst commented, Asia was “freaking out” in what was a classic knee-jerk reaction to a significant event. In the following few hours, and ahead of the U.S. markets’ opening, conditions calmed, with the VIX coming off the top, the equity futures markets regaining some ground and gold meeting profit taking in Asia as well as some producer sales into the price strength. Gold also failed at an important technical level, stopping at the downtrend line that dates back to the record highs of 2011.
So was it all a flash in the pan?
The answer to that is “No”. It should not come as a surprise that some miners would wish to lock into a smart rally, nor that there should be some investor selling in China as holders who had previously bought in the $1,300 region took advantage of the opportunity to take some profits. Now we need to look to the future and the swirling uncertainties around the economic and political outlook. Certainly President-elect Trump appeared to adopt a more conciliatory tone in his initial remarks than in the oh-so-combative Presidential election campaign, but the markets will need more guidance before they can settle. In the short term, therefore, further volatility and risk-off activity could easily prompt further gains in the gold price, while for the longer term the picture is more hazy, but points overall to further bullish action. This though is more likely to be on the basis of bargain hunting into dips rather than a headlong pursuit of higher prices.
Initial concerns all point to the potential for further safe haven buying, as described in our recent piece as to whether the outcome of the Presidential election would be bigger for gold than Brexit [link]. There will almost inevitably be heightened concerns over the potential for geopolitical instability, while there is also a question mark about Trans-Pacific Partnership (TPP), discussed here [link to Erica’s piece]. This affects trade relationships, as if the TPP is not implemented then existing tariffs will, at the very least, be maintained rather than removed and Mr Trump has been consistent about his intention to renegotiate trade arrangements. The probability of this eventuality, though, as with other areas of policy, is still unclear as it is still eminently possible that the Trump team of advisors will take more of a middle ground than the policies advocated in the Presidential campaign.
Meanwhile the call for substantial tax cuts could well result in renewed widening of the budget deficit; and this, while it could also stimulate economic activity and therefore reduce the domestic desire for safe haven assets, has longer-term inflationary implications, especially when battened onto the fall-out from the ultra-loose monetary policies of recent years – and not just in the United States.
Meanwhile an additional uncertainty now revolves around interest rate policy. Mr Trump is already intimating that he may not renew FOMC Chair Janet Yellen’s post when her first term ends in 2018 – and this has prompted some speculation that she may go sooner. The unification of the Administration and Congress is also something of an unknown. Much depends on the identity of key appointees in both bodies.
So on the basis of these considerations the medium-term outlook for gold is bullish on the back of uncertainty over the evolution of economic policy and its impact on stability and inflation, plus concerns (misplaced or otherwise) over trade and the development of international relations.
Meanwhile, given the fresh uncertainty over the outlook for interest rates it may well be that while the markets are looking at all these winds of change, gold will also have to continue doing what it has been doing at least for the past three years – Fed-watching.