Gold had a crazy day on Wednesday following Donald Trump’s surprise victory. In the run up to the election a Trump win was seen as gold positive because of the heightened uncertainty it entails. Just like the unexpected Brexit result back in June gold began taking off, while stocks and the dollar dropped, as the started-by-state results started to emerge.
Gold surged past resistance at both $1,308/oz and $1,328/oz but before Trump’s win had even been officially confirmed most markets began reversing. Trump in his acceptance speech struck a conciliatory tone while highlighting his call to rebuild America through increased spending on infrastructure.
The stock market liked what it heard with a rally among industrial, healthcare and financial stocks lifting the S&P500 by 138 points from its low point. Bonds, meanwhile, sold off with investors seeing $377bn wiped off the value of securities that comprise an index of global bonds.
The selloff was stoked by rising risk that Trump’s tax cuts and looser fiscal policies would lead to a surge in inflation.
Rising bond yields are not good for gold unless the rise is accompanied by a similar rise in inflation. The chart below shows that the initial move in 10-year bond yields has seen the real yield rise to 0.23%, the highest since June. Low real yields have been supportive, and with the current rise in inflation expectations, should continue to provide support for alternatives such as gold. But for now the spike in nominal yields has created an unfavourable environment.
The initial sharp selloff in the dollar on Wednesday night also helped drive gold higher but the greenback recovered strongly as demand for EUR, JPY and CHF evaporated.
The return of the dollar index to near the highest level since March today has further reduced demand for gold.
The surging demand for copper and other industrial metals lend support to semi-precious silver which earlier today once again tested but once again got rejected at $19/oz. Copper is increasingly in danger of seeing a correction after rallying by more than 8% in just two days and this could add some pressure to silver and thereby remove some support for gold as well.
All this lead us to believe that gold is once again challenged by the events of the past couple of days.
The surge in bond yields will provide some headwinds until we see the market either stabilise or see an additional pick-up in inflation expectations.
Investment demand through exchange-traded products has seen a continuous rise ahead of and also following the election.
Once again the behaviour among these, often viewed as long term, investors should give us a guide as to the direction of gold. Donald Trump has bought himself some time with his acceptance speech but uncertainty could soon resurface as he begins to announce which of his pledges he is going to attempt to carry out. Inflation is slowly making a return and with his loosening fiscal stance we may see that accelerate into 2017.
Such an environment of rising inflation and political uncertainty is likely to support gold but for now it is once again challenged and need a clear break back above $1,310 to re-ignite demand from tactical and technical traders. A break of trend line support at $1,252 would raise the downside risk.