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Gold Down On Inflation Trade

November 10th, 2016 by

Gold prices are lower again on Thursday morning in the face of the largest selloff in U.S. Treasurys in nearly 10 years. The yellow metal slipped from Wednesday’s closing price, shedding over $10 per ounce to trade just above the $1,265/oz mark. While this is a far cry from gold’s high near $1,340/oz in Asia overnight on Tuesday, it represents a compelling buying opportunity for bargain-hunting investors.

Spot silver was up yet again on Thursday, however, trading 7¢ per ounce higher (+0.4%) to stay around the $18.60/oz level. The argent metal has already gained almost 3.9% thus far in November.

Fed and Economy

In the aftermath of Donald Trump’s election victory, the global markets witnessed an almost unprecedented selloff of government bonds. With inflation indicators finally beginning to pick up and a December rate hike still on the table for the Federal Reserve, traders and investors began dumping U.S. Treasurys in earnest. Over two days, the yield on the benchmark 10-year Treasury note surged a whopping 30 basis points to 2.11%. This is the first time the 10-year T-note has sported a yield above 2% since late January.

Reports on Thursday showed that weekly jobless claims remained low, dropping by 11,000 to just 254,000 new claims. This followed a three-month high for the measure.

© Alexmillos | Dreamstime.com - Inflation Loading Bar Sign Concept Photo

© Alexmillos | Dreamstime.com – Inflation Loading Bar Sign Concept Photo

Some have speculated that the volatility in the financial markets that the prospect of a Trump presidency brings could cause the Fed to rethink its plans for a rate hike next month. However, markets seemed to have calmed down quite a bit. Not only would holding off on a rate increase put the Fed behind the curve on controlling inflation, but such restraint is unlikely to sync up with Trump’s economic policy. The president-elect has suggested he will pursue aggressive infrastructure spending, which central banks have been begging for to no avail. Such a move would raise inflation expectations, strengthening the case for higher interest rates.

Trump Expectations

A rate hike would also help counteract a potentially weaker U.S. dollar. While the greenback has rebounded on the DXY index to 98.9 this morning, the chances are good that the dollar loses ground on the foreign exchange markets in the early stages of Trump’s time in office. At the same time, the Chinese renminbi (yuan) fell to a fresh six-year low thanks in part to Trump’s repeated accusation that China is a currency manipulator. If the new president indeed pursues trade sanctions against China for manipulating its currency, the yuan will continue to slide.

If Trump succeeds in getting an infrastructure spending measure through Congress, the current rally in base metals is likely to continue. Zinc, iron ore, and other raw commodities have been on a tear lately. Copper has seen its biggest rally of all-time, and is currently trading above $2.55 per pound.

Moreover, if President Trump can match this fiscal policy with his promise to cut regulations, several sectors of the economy would benefit—namely energy, banking, and pharmaceuticals. Despite the possibility of Trump’s energy policies boosting commodities, crude oil is still being held down after the International Energy Agency (IEA) warned that non-OPEC oil production (especially in Russia) may soon rise as much as 111,000 barrels per day.

 

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