Market Roundup October – Election Special

Following the results of the US Presidential Election 2016, this month’s market roundup looks at some pre-Election predictions from market commentators as well as discussion around possible future market positions.

Approaching the Election

On the run up to the election and between the 5^th and 7^th of October, the price of gold fell sharply to ‘Pre-Brexit levels’ and dropped below a key technical threshold – ‘the 200-day moving average’ which is a position used by analysts to predict future price fluctuations. In sterling terms, the price of gold dropped 3.3% and fell to under £1000 an ounce. This was reported to be the biggest one-day drop in three years. As a result of this, many UK bullion dealers reported a huge rise in physical demand as investors chose to take the opportunity to buy. Silver also saw losses at the beginning of October and dropped 9.5% – its steepest slump since 2013.

Many suggested that investors were increasingly convinced that the U.S. Federal Reserve was planning to raise interest rates as minutes from the September meeting suggested that the decision to keep interest rates unchanged was a “close call”. An increase in interest rates tends to lessen the appeal of assets such as gold and silver as they don’t pay dividends and often have associated holding costs.

Whilst this was the case, in mid-October there was still much discussion regarding the possible outcome of the election and the possible knock-on effects on global markets which could result. In an interview with CNBC, former U.S. Representative, Ron Paul suggested that although the outcome of the election was still ‘up for grabs’ there was one area of the market that would ‘flourish in the long-term’ – and that was gold.

Although the precious metal had just recorded the worst weekly drop since 2013, Paul suggested that “short-term, gold has taken a big hit and it could very well go down more but it’s still up 10 percent from a year ago” and that “The laws of economics are more powerful than all the politicians and all the bankers – believe me, [regardless of the election results] gold prices are going up.”

Towards mid October, Chris Louney, Commodity Strategist for RBC Capital Markets noted an interesting and ‘strange correlation’ between Donald Trump and gold. “Gold reacts when Trump’s chances of winning rise above 40 percent or below 20 percent in the mainstream media,” Louney explained. This was because both of Trump’s highest polling positions in the previous five months coincided with high points for gold. In early August, when the precious metal was trading near $1,400, Trump’s chances of victory were at 50 percent, according to FiveThirtyEight. And, in late September, when Trump’s chances were at 46 percent, gold hit a high of $1,339.

At the start of November, HSBC suggested that investors should choose gold as we begin to approach the day of the election as it would be a certain winner – no matter who wins at the polls. According to James Steele, the bank’s Chief Precious Metals Analyst, both candidates have backed trade policies that could stimulate demand, with gold offering a potential “protection against protectionism,” Steele said. As Hillary Clinton, the Democratic candidate has also argued for the renegotiation of longstanding free-trade agreements, both outcomes could prove positive for gold.

It was suggested that if Donald Trump triumphs at the polls, gold could rise to $1,500 an ounce and if Clinton wins – the price of the metal could improve to $1,400 an ounce by year end.

James Butterfill, head of research and investment strategy at ETF Securities, echoed the comments by HSBC and also suggested:

“Gold is seen as a hedge against political uncertainty, and President Trump would bring more political unpredictability than any president for generations, particularly over the U.S. Federal Reserve’s leadership and monetary policy strategy.”

Following the Election

Following the election result and the somewhat surprising victory for Donald Trump, market reaction was initially negative, with major stock indices turning sharply and immediately downwards. In the early hours of the morning in the UK, the gold price soared – led by the Shanghai afternoon fix. The dollar price of gold surged by almost 5% for UK buyers.

But the simultaneous weakening of the dollar, and a rebound in world markets in the morning saw the price of gold retreat back to just over £1040 by early trading in London, the same price as two weeks ago. This price continued to decrease steadily throughout the day.

This decrease in price did nothing to dissuade investors as the Trump win caused the busiest ever gold trading day as reported by Bloomberg. More than 780,000 futures changed hands by 2:30 p.m in New York, surpassing the volume on June 24 after Britain voted for Brexit and is more than four-times the 100-day average.

This activity wasn’t just seen in the USA as trading on our own platform royalmintbullion.com quickly surpassed previous records set after the Brexit vote.

However, the threat of a so-called ‘Brexit-plus-plus’ impact that would wipe trillions off global markets failed to materialise. This was due, in part, to Trump’s acceptance speech. “Mr Trump managed to sound quite conciliatory and presidential in his victory speech this morning,” Mitsubishi analyst Jonathan Butler told the Reuters Global Gold Forum on Wednesday. “There was none of the harsh rhetoric that we heard during the campaign. This calmed the markets and helped boost the dollar, eroding gold’s gains,” he continued. “[But] the Trump win is still essentially bullish for gold.”

The Longer Term Effect

Whilst it is still too early to say what the election means in the medium to long term, as Trump’s stance has always been ‘pro-business’ he promises to lower income tax and corporation taxes. This could certainly prove a boost to the economy in the US, but it is still likely to cause uncertainty in the short term. As history has taught us, new introductions of domestic and foreign trade policies within the United States causes this sort of uncertainty and could result in further investment in safe-haven assets, such as gold.

Other market uncertainty is likely to be seen in the coming months which could affect the price of gold and wider markets; most notably the possibility of the introduction of the promised tariffs which could be directed against the US’ trading partners including Mexico and China. We are also still yet to find out who the President-elect’s nominees will be and as Trump’s campaign was facilitated by a very close circle of advisors, there is a risk that the election victory could reinforce his ‘closed’ leadership style. This strategy is likely to produce greater uncertainty for markets.

In Other News

World Gold Council – Demand Trends Report

The World Gold Council recently released the third quarter 2016 Gold Demand Trends report. Some highlights from the report are –

• India Demands: India’s gold market has faced a challenging year and consumer demand has sunk to a 7-year low. This was primarily due to near-record prices, fragile rural sentiment and tight government regulations.
• Sizeable year-to-date inflows into ETPs which have been fuelled by uncertainty caused by geopolitical risks such as Brexit and the US election as well as negative interest rates.

You can read the full report on the gold.org website.

India

India is the largest importer of gold with a recorded annual consumption of around 1000 tonnes but a decision by the Indian government to withdraw 500 and 1,000 rupee notes from circulation has caused a spree in gold buying. The surprise move is part of a government crackdown on corruption and illegal cash holdings as in addition to the prolific use as a store of undeclared wealth, the World Bank estimates that 28% of those in circulation are forgeries. This sudden increase in demand caused some jewellers to stop trading in gold until the prices began to stabilise and caused some consumers to turn to the so-called ‘grey market’ to source their precious metals for the upcoming wedding season.