Prior to election day in the U.S. (November 8th), a Donald Trump victory was seen as good for the price of gold, as a flight to safety and a “risk-off” trade would drive capital into gold as a safe haven trade. Expected high budget deficits due to infrastructure and military spending, announced by Trumo, and higher interest rates (and hence, interest expense) would drive U.S. sovereign debt higher, potentially weakening the U.S. dollar. In fact, Trump’s infrastructure investment plan is estimated to cost between USD 500 million and USD 1 trillion.
Immediately following the election, the price of gold jumped by around 5%, to almost $1,340 per ounce ($1,340/oz) (see the chart). Analysts were anticipating a $1,500/oz gold price in short order.
But that rally was very short-lived as a “risk-on” strategy became the flavor of the moment, and capital flowed back into stocks, especially those linked to infrastructure and building materials. Pharmaceuticals also rose dramatically while health services stocks fell. Many analysts are now suggesting that economic growth in the U.S. will be enhanced under Trump’s economic program of lower taxes and higher infrastructure spending. Between Wednesday and Friday (November 9-11), the Dow Jones Industrial Average index rose by 2.8%. US dollar strength over the same three days (up 3%) put pressure on the price of gold, as it plunged almost 9%, reaching close to the six-month lows.
That said, fundamental factors for the long-term strength for gold prices remain in place and this may create a good opportunity to buy gold on current weakness. Stronger U.S. economic growth may drive inflation higher, and will likely gold prices follow the inflation. The American economic growth would help drive commodity price strength, while higher inflation, if not fully matched by higher interest rates, could put downward pressure on the U.S. dollar, also a boost for gold prices.
There are already signs that the U.S. is experiencing higher inflation. In September, on the monthly basis, the Consumer Price Index increased by 0.3%, after rising by 0.2% in August. Rising housing costs and less than expected energy price drops were the major factors behind the higher inflation rate. Annualized, in the last 12 months through September, 2016, CPI was 1.5%, the highest annualized rate since October 2014. The International Monetary Fund expects that the U.S. consumer price inflation will reach 2.3% annually in 2017, and will thus exceed the Federal Reserve’s target of 2% one year ahead of the Fed’s forecast.
Gold prices may experience further weakness from current levels if general inflation in the U.S. remains muted (low oil prices among other factors are contributing factors here), while an expected Federal Reserve rate hike in December may contribute towards this end. But the expected inflationary impact of Trump’s economic plans appear to be driving the current bullishness in copper and other base metal prices, which may spill over to other commodities in time. If the price of gold remains weak, it may create an opportunity to buy gold stocks or gold ETFs at attractive levels.
Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
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