Trump impact: How has outlook for gold changed after US elections?
A resounding victory of Donald Trump in the US Presidential elections led to a sharp decline in gold prices as traders booked profit and some selling emerged on concerns over a possible rise in the US fiscal deficit on his stance of stimulating US growth, which would entail huge borrowings, which, in turn, would push up the US yields. Healthy risk appetite is also weighing on the metal.
The US borrowings would put an upward pressure on the US yields and support the US Dollar Index. In addition, his tax cut propositions would also increase the US borrowing as his planned tariff impositions on trading partners are unlikely to fund the resulting fiscal deficit. Both fiscal deficit and debt/GDP ratio are expected to rise further along with inflation.
Although gold has been rallying hard in the run up to the US elections on these factors only, the metal is presently sliding lower as uncertainty over the outcome has been resolved and markets are embracing his growth vision at least for now.
Spot gold closed with a loss of 0.82% at $2684 on Friday as the US Dollar Index gained despite lower US yields. The metal was down nearly 2% on the week.
US Dollar Index and yields:
On November 6, the US Dollar Index rallied to 105.44, the highest level since July 3, as surging yields boosted the Index. The Index closed with a gain of 0.42% at 104.95 on Friday and was up approximately 0.70% on the week.
The US yields, following sharp rallies in the run up to the election, softened towards the end of the week as the US Fed slashed the Fed Fund rate by 25 bps to 4.50%-4.75% range.The 10-year yields, after hitting 4.48% in the week — the highest level since July 1–closed with a loss of 0.85% at 4.30% on Friday and were down around 2% on the week. The 2-year US yields at 4.25% were up nearly 1% on the week.
ETF:
Total known global gold ETF holdings fell for the fifth straight day to 83.661 MOz on November 7; holdings were lower than the level of 83.969Moz noted at the end of the previous week.
Data and event roundup:
The US data released in the week ending November 8 were largely encouraging. University of Michigan sentiment (November prel.) data released on Friday came in at 73 (forecast 71), while one-year inflation expectations at 2.60% fell short of the expectation of 2.70%.
ISM Services (October), reported earlier in the week, came in at 56, which topped the estimate of 53.8 as ISM prices paid were slightly hotter than expected. Unit labour cost (3Q prel.) at 1.90% was higher than the forecast as even the prior data was revised sharply higher from 0.4% to 2.40%. The weekly jobless claims remained around the pre-covid levels.
The US Federal Reserve slashed the rates by 0.25%, which was in line with the expectations. The Fed Chair said that it is not a policy signal, and the Bank can adjust the rate cut pace as per the requirement.
The Bank of England, as expected, cut the benchmark rate by 25 bps to 4.75%, though the Bank warned on the UK’s budget inflation hit, which means that it may not cut rates too quickly unless needed.
Upcoming data and event:
Next week, investors will closely watch the US CPI (October), PPI (October), retail sales advance (October) and industrial production (October). China’s home prices (October), industrial production (October), retail sales (October) and property investment and sales (October) will also be investors’ radar. Investors will also be interested in the Fed Chair Powell’s speech on Friday.
Outlook:
The US yields are likely to resume the upward momentum sooner than later, which is likely to push the US Dollar further up. These traditional drivers, though not seen much effective in governing gold price in recent past, may once again become relevant in near term. Risk appetite is likely to be healthy. These factors along with mild ETF outflows are likely to act as headwind for the metal.
The metal may get some support from underwhelming stimulus at China’s National Congress’s standing committee meeting concluded on November 8 wherein the committee announced a debt swap worth $1.40 trillion to clean the balance sheet of the local governments. The much anticipated fiscal stimulus is still elusive. A possibility of Geopolitical risk eruption is yet another supporting factor. On the balance, the yellow metal is expected to trade with a bearish tilt in very short term. However, overall, fundamentals remain intact. Ballooning fiscal deficit, elevated debt/GDP ratio, geopolitical tensions, de-Dollarisation, buying by central banks, etc are likely to catapult gold prices higher in medium to long term.
Support is at $2650/$2635/$2600, whereas resistance is at $2710/$2730/$2750/$2785/$2800.
(The author Praveen Singh is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)
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