Trump wins, gold loses – how is it possible?

Market report Michael Blumenroth – 11.11.2016

Weekly market report

It might sound precocious but I have to say it: I was secretly expecting a Trump victory, having very clearly heard the message sent to politicians by the British Brexit vote. However, I never would have guessed that the markets would react the way they have since Wednesday afternoon.

The previously supposed causal chain was as followed: Trump wins, which causes market uncertainty, the US dollar slumps against the major industrial nation’s currencies (euro, yen, Swiss franc). Stock markets slump, gold surges.

Well, for the first three hours these expectations seemed to be met, when Trump had just won the states Florida and Ohio and until his first speech as president elect. The speech turned out to be much more moderate than anticipated following his aggressive campaign rhetoric. At the same time, returns on US government bonds, which had initially lost ground as safe havens, rose. The markets turned by 180 degrees, most likely caused by the following consideration: Trump had announced his intentions to dramatically change fiscal policy, amongst others aiming for increased infrastructure measures and tax reliefs, which means the US will have to increase debt in the medium term. To finance these debts, the US will have increase interest on its government bonds, a fact which has caused their returns, as well as the US dollar, to rise.

These two facts together – higher interest rates on bonds and a more expensive US dollar, in addition to surging stock markets, thwarted the gold price and sent it on a tailspin.

While gold traded at a sound 1,300 US$/ounce last Friday and it still held relatively firm on Tuesday evening in expectation of a Clinton victory at 1,268 US$/ounce, it climbed to 1,337 US$/ounce on Wednesday night between 3 and 6 a.m., which is when the turnaround occurred. The gold price came under pressure and fell to 1,251.50 US$/ounce last night, currently trading at 1,259 US$/ounce. Quite honestly, I never would have expected this development to follow a Trump victory.

For investors in the euro zone, the price decline was somewhat softened by the weaker euro, but we have certainly seen better weeks for gold investments this year. From 27.70 €/gram exactly a week ago, the gold price climbed to its weekly high of 38.25 €/gram on Wednesday before the downswing. Xetra-Gold fell to 37 €/gram this morning and has since only slightly recovered to 37.15 €/gram.

An exciting week now lies ahead. Should the fears of inflation further rise, gold might profit; if the US dollar and US treasuries gain further ground, the gold price will most likely suffer. 

Following this strenuous week, I wish you all a relaxing weekend.

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