The Post-Election Gold Rush

November 9th, 2016 by

After more than a year of tireless campaigning and unprecedented invective, this election cycle has finally come to a close. While many voters are relieved to have the vitriol and controversy behind them, the financial markets have not taken kindly to the lack of clarity that a transition to a Trump administration in the White House offers. The establishment has really never had a way to prepare for the type of shakeup that Washington, D.C. is about to see.

Yet, if you bought gold, you’re doubly happy with having taken out that insurance policy!

The Trump Effect

It’s been no secret throughout this campaign that the notion of Trump in the Oval Office “unnerves businesspeople and economists who see him as a reckless novice who might disrupt trade and a struggling global economy,” according to Joe McDonald from the Associated Press (AP).

Interestingly enough, the scenario for gold looked bright no matter which party prevailed in the election. If Clinton had won, as pundits almost unanimously expected, the Fed was likely to follow the same path of extreme monetary policy that has imperiled the global financial system. Although the election of Trump has thrown this into question, the uncertainty alone is enough to roil the markets.

As the results from the voting polls were first being reported, showing Trump ahead of what was predicted, the gold market reacted swiftly. Spot gold spiked $60 per ounce higher as the early results came in, touching close to $1,340/oz, near its 2016 high. At the same time, Dow futures plunged 800 points at one juncture. As the country—and the world—came to terms with the election outcome on Wednesday morning, the markets had calmed considerably. Meanwhile, silver surged close to $19/oz before settling around $18.50/oz.

What to Expect

Although overall gold demand was down this autumn, primarily by less purchases in India and China, the World Gold Council (WGC) reported that investment demand for gold was up 44% during the third quarter. This was driven mostly by activity in gold exchange-traded funds like the SPDR Gold Trust ETF (GLD).

While gold prices had a predictable initial reaction to the shock of Trump’s victory, this is hardly the end of the ride. Relative to his aggressive rhetoric on the campaign trail, it’s unclear what kind of actual policies President Trump will pursue—and what articles of his policy agenda will prove downright impractical.

When it comes to market reactions, the psychology of how investors cast their votes with their money provides some insight into how markets will perform as we move through a Trump presidency. In a broad sense, Trump’s consistent position has been that America’s place in the global order (and thereby the role of the dollar within that order) needs to be changed and renegotiated. One would conclude that this will cause Wall St and other global investors to dump the dollar and show less confidence in the stability of the U.S.-led system. Such a development would be supportive of higher gold prices, and could spur steady gold-buying throughout the next four years.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.