Having seen a robust performance thus far this year, Trump’s victory has catalysed further bullish sentiment in the base metals complex on the back of fiscal stimulus anticipated from the incoming administration. The market appears to be in a euphoric mood at the moment, underpinned by the ‘Trumpflation’ trade, which has benefited US equities, dollar and industrial commodities. However whilst gold and silver initially rallied from the surprise election result, the rally soon gave way to the so-called ‘Trumpflation’ trade – a bet on fiscal stimulus in infrastructure spending, faster rate of inflation and a more hawkish stance by the Fed. Given that inflation itself is currently very low, and that gold tends either to anticipate substantive inflation in the first instance or to respond to accelerating inflation in the second, the prevailing background low-inflationary environment means that, this time, gold looked at another important parameter, which is the prospect of rising interest rates and this was the key driver of the downward move. We believe a December rate hike is fully priced into the markets now, and expectations of more aggressive rate rises in the horizon has cast a cloud of gloom on the precious metals complex.
Gold and silver have experienced losses exceeding 7% and 11% respectively since the U.S. election.
The precious metals complex might have to look for salvation, at least in terms of stemming the price fall, from the entry of physical buying since gold and silver prices have triggered key psychological levels of $1,200/oz and $16.50/oz respectively. Thus far, physical demand from China, Middle East and South East Asia has increased slightly, but it is by no means swamped by new orders the way it was in 2013.
The price swings observed in the markets since the U.S. election are dramatic indeed. The sudden display of market exuberance in the wake of election results was not a behaviour anticipated by experts as many were expecting a Trump victory to be favourable to the precious metals complex. While the Trump administration might be more pro-business and fiscal expansion, we think prices are moving ahead of its fundamentals at the moment. In fact, Trump’s recently aired first 100 days plan did not lay out any concrete policies on fiscal spending to underpin the bulls’ sentiment. Until that happens, market attention at the meantime is firmly on the FOMC’s expressed policy next month for a glimpse of the pace of rate hikes to expect in 2017. – Reuters