Safe havens, gold overlooked after US Congressional elections

Market report Michael Blumenroth – 08.11.2018

Weekly market report

As this week’s report is published a day early, a potential market reaction to the meeting of the US Federal Reserve, scheduled for this evening, is not included. Market observers are, however, not expecting any surprises anyway. The meeting on 19 December will likely be more consequential, with an expected 80 per cent likelihood of a further interest rate hike by the US Federal Reserve.

Stock markets see election results positively

This week has already seen one eagerly awaited event, the US Congressional elections. As expected, the Democrats won the majority in the US House of Representatives, while the GOP was able to defend and slightly expand its Senate majority. The stock markets have taken a favourable view on this outcome, as it will allow US President Trump to continue his business-friendly policy. However, with their majority in the other House, Democrats will hold the GOP’s power partly in check, for example when it comes to public debt. Practically speaking, US policy will likely see little change.

US dollar rises

In a first reaction to the election result, US yields/market interest rates alongside the US dollar slightly slumped (in the assumption that governance is to become somewhat more difficult for Trump) the markets turned around yesterday evening. US yields rose, as did the US dollar, which also put the brakes on gold.

Gold, safe havens weaker

In US-Dollar terms, gold traded at 1,235 $/ounce on Friday morning last week and rose to a weekly high of 1,236.50 $/ounce on Friday afternoon. Following a slow start to the week on Monday, gold was volatile on Election Day, Tuesday, and yesterday, Wednesday. However, it moved within in a rather narrow trading range – around 1,236 $/ounce to 1,224 $/ounce. While gold rebounded to 1,236 $/ounce yesterday at noon, it has steadily declined since yesterday afternoon. This morning (Thursday), it reached a new weekly low at 1,222 $/ounce and currently hovers nearby at 1,224 $/ounce. Other safe havens (yen, government bonds) have also lost value.

Gold in euro also drops

Following the elections, the euro initially rose against the US dollar, but has shed all gains since yesterday afternoon after briefly scraping at the 1.15 €/gram level. The small slide in the euro price of gold since yesterday noon has hence been somewhat dampened. Xetra-Gold rose from 34.75 €/gram last Friday morning on Election Day, Tuesday, to its weekly high of 34.85 €/gram, declined to 34.40 €/gram on Wednesday afternoon and kicked off trading at 34.45 €/gram this morning.

Outlook: year-end rally vs. economic optimism

In the days and weeks to come, the markets will settle in to life after the US Congressional election. Traders and investors are eagerly awaiting possible developments in the US-China trade conflict and potential developments regarding Brexit. Many investors now also seem to be forecasting a year-end rally across the stock markets, which might exert slight pressure on safe havens. On the other hand, increasing economic optimism could lead to an increased demand for commodities such as metals. Let's wait and see.

I wish all readers a restful weekend and a great time to those of you attending the International Precious Metals & Commodities Show.

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