Gold prices have been in a sideways channel because the market has largely been waiting to judge the impact of the Trump presidency. Clearly the markets have rallied heavily post-election, offering a brief stint of price volatility on gold the evening and the day after the election. Since then, however, gold has been in a sideways channel, if not a slow decline in value.
Why is that? What we have seen has been a phenomenal market reaction to what pragmatists would consider an affirmation to the policies proposed by the President-Elect.
A Trump presidency is foreshadowing a sensible approach to encourage commercial growth, which is an acknowledgement that the corporate taxation programs are hurting US corporations and negatively attracting would-be foreign direct investment into industry. With this bullish expectation, and if for nothing other than a clear change from typical Washington DC policies regardless of party, there is a fresh sense in the international community that something is going to happen. That something is being weighed in the courts of the market opinion which foreshadows the US for a long-awaited accelerated growth track.
As a result, we are seeing a strengthening dollar. With a pro-business President-elect, I would expect to see massive capital inflow, and what we will see as a true stimulus based on national productivity, job growth, massive infrastructural projects and repatriation of capital. When looking at a “stimulus,” one that is based on capital and job creation, it will likely always strengthen the underlying opinion of that nation’s currency value, versus a prior stimulus approach that is otherwise based from the printing of money for distribution amongst voting constituents.
If the USD continues to strengthen or hold its current value, gold will stay in a declining price level or remain in a sideways channel. With the recent Federal Reserve announcement of a 0.25% rate hike, the USD further strengthened, thereby dropping the value of gold per ounce a bit more. We would have expected to see a rise in the USD index from this rate hike, although the markets had largely priced this in. In 2017, we would suggest to look for downward pressure on the US dollar index in the 2nd quarter of 2017, as market makers and manufacturers will try to influence a weaker dollar to help stimulate US exports.
Once the changing of the guard has transpired in Washington, and we are into the first 100 days of the new presidency, the global markets’ affirmation of this election will slow down, and usher in business as usual. What we know is that an excessively high valuation on the USD harms exports. We also know that a President who is looking to increase manufacturing and exports will need to evaluate policies in cooperation with the Fed, which will create a USD valuation that presents optimal opportunity to encourage export. This can be achieved in part with a slightly weaker dollar.
If and when that happens, we expect to see a rising price of gold by trend in the 2nd quarter. 2017 will be a time of intellectual assessment of what the next four-to-eight years will present. Once that assessment becomes clear, we will see trends with greater clarity. If you are trading gold in the short term, look for a bi-directional strategy, unbiased to market direction. If you are buying gold in physical, we like the price point and it’s a good time to buy and hold.
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