Investors piled into gold when polls showed Donald Trump's chances for victory were improving. Now that he has won the presidential election, they are selling. The turnabout reflects how rapidly markets are reassessing what a Trump presidency could mean for US economic growth, inflation and interest rates.
But his first moves as president-elect, including a conciliatory victory speech that included plans for infrastructure spending, left investors with renewed hope for a stable transition and allowed them to focus on Trump's plans for economic growth. Before the election, gold prices were expected to benefit no matter who was elected president, with a Trump win potentially disruptive politically and economically, and a Clinton win seen as inflationary - both of which might have contributed to higher gold prices.
A look at gold's performance during past presidential administrations stretching back to Gerald Ford's in 1974 shows it was susceptible to changes in inflation till the early 1990s. When inflation rose, gold would rise. But, the yellow metal's performance since the Bill Clinton administration has been dictated by a wider range of forces. During Obama's second term, improvement in the output gap - the difference between an economy's actual output and its maximum potential output - and a rise in US real yields, along with a sharp rally by the US dollar, sent gold tumbling between 2013 and 2015. A deterioration of US real yields and safe-haven demand amid geopolitical shocks have allowed gold to rebound this year.
Gold would find support due to inflation outpacing growth, because of forecasts for interest rates remaining negative and a longer-term downtrend for the US dollar. A push toward protectionism would be negative for growth and disruptive and divisive for the global economy and extremely positive for bullion. Trump's pledge to tear up trade agreements and a rise in overall uncertainty over the policy outlook would likely dent the US economy while spurring a rise in demand for gold.
The bullish case for gold
A bullish case for the metal still exists, even in a world of rising interest rates. There is still a lack of clarity on the policies of a Trump administration, or how they will be funded. The tax cuts and fiscal spending Trump has proposed could send inflation higher. Some investors buy gold when consumer prices rise, expecting the metal to hold its value better than other assets. Others point to geopolitical risks that could spark renewed demand for gold's safe-haven properties, such as Italy's December 4 referendum on a constitutional overhaul that could shake up its government and open the door for an exit from the European Union.
US equities have also been on the rise with strong gains seen, as gold prices settled, drawing more attention away from gold as a safe-haven investment. However, after the announcement of a rate hike, equities could be strongly dented, which could see investors move to the protection of gold.
Gold set to fall in India?
But, the prospects for gold in India, one of the largest consumers, does not look very good going into 2017 largely due to Prime Minister Modi's shock demonetisation drive. Several households, who were stuck with old currency notes, converted them into gold, after the demonetisation move was made public.
Demonetisation will erode the use of cash and lead to increased transparency in realty and bullion transactions. This could potentially bring down demand for gold in rural areas. As it is, demand has been at its lowest this year due to many factors. So, physical demand could be certainly dented and add to domestic market weakness going into 2017.
In conclusion, though there is scope for prices to further weaken in the short-term, in the medium to long-term, the positive drivers could see a revival in prices due to potential inflationary expectations and safe-haven demand on the back of falling equities. So, the present decline could once again provide an opportunity to participate in the uptrend.
Gnanasekar Thiagarajan is a Director at Commtrendz Research and a consultant to commodity bourses and corporations both in India and the overseas.
He has more than 20 years of experience in commodity and forex trading and was formerly a forex dealer with the Bank of Nova Scotia.
**Investors are requested to consult their financial advisors before doing anything based on the above recommendations.
From the Editor's desk: A tweet to mull over. Do you agree with Gurumurthy?