The Trump Effect: How has the outlook for gold changed since the US election?

Gold prices fell sharply after Donald Trump’s landslide victory in the US presidential election as traders booked profits and some selling emerged on concerns of a possible increase in the US fiscal deficit over his stance to stimulate US growth. Borrowing, which in turn, will increase US yields. A healthy risk appetite is also weighing on the metal.

US borrowing will put upward pressure on US yields and support the US dollar index. Additionally, his tax cut proposals would also increase the US debt as his planned imposition of tariffs on trading partners is unlikely to fund the resulting fiscal deficit. Both the fiscal deficit and the debt/GDP ratio are expected to increase further with inflation.

Although gold has seen a strong rally in the run-up to the US elections based on these factors, the metal is currently sliding lower as uncertainty over the outcome has faded and markets are embracing its bullish outlook, at least for now.

Spot gold closed down 0.82% at $2684 on Friday as the US dollar index rose despite lower US yields. The metal was down about 2% for the week.

US Dollar Index and Yield:
On November 6, the US dollar index rose to 105.44, its highest level since July 3, as rising yields lifted the index. The index closed up 0.42% at 104.95 on Friday and was up about 0.70% for the week.

US yields, following sharp rallies leading up to the election, softened over the weekend as the US Fed cut the fed funds rate by 25 bps to a range of 4.50%-4.75%.

The 10-year yield, after touching 4.48% on the week — the highest level since July 1 — closed down 0.85% at 4.30% on Friday and was down nearly 2% on the week. The 2-year US yield was up nearly 1% on the week at 4.25%.

ETFs:

Total known global gold ETF holdings fell for the fifth consecutive day to 83.661 MOz on November 7; The holding was lower than the level of 83.969Moz recorded the previous weekend.

Data and Event Roundup:
US data released in the week ended November 8th was mostly encouraging. University of Michigan sentiment (pre-Nov.) data released on Friday came in at 73 (estimated at 71), while one-year inflation at 2.60% was below expectations of 2.70%.

ISM services (October), reported earlier in the week, came in at 56, topping estimates of 53.8 as ISM prices paid were slightly warmer than expected. Unit labor cost at 1.90% (3Q ex.) was higher than forecast as the previous data was also sharply revised from 0.4% to 2.40%. Weekly jobless claims remained around pre-Covid levels.

The US Federal Reserve cut rates by 0.25%, in line with expectations. The Fed chair said it was not a policy signal, and the bank could adjust the pace of rate cuts as needed.

The Bank of England, as expected, cut the benchmark rate by 25 bps to 4.75%, although the bank warned of a UK budget inflation hit, meaning it will not cut rates quickly unless necessary.

Upcoming Data and Events:
Next week, investors will closely monitor US CPI (October), PPI (October), retail sales advances (October) and industrial production (October). China’s house prices (October), industrial production (October), retail sales (October) and property investment and sales (October) will also be on investors’ radars. Investors will also be interested in Fed Chair Powell’s speech on Friday.

Outlook:
US yields are likely to resume upward momentum sooner rather than later, which is likely to push the US dollar higher. These traditional drivers, though not seen to be very effective in controlling gold prices in the recent past, may once again become relevant in the near term. Risk appetite is likely to remain healthy. These factors along with mild ETF outflows are likely to act as headwinds for the metal.

The metal may get some support from lackluster stimulus at a meeting of the Standing Committee of China’s National Congress that concluded on November 8 in which the committee announced a $1.40 trillion debt swap to clean up the balance sheets of local governments. The much-anticipated fiscal stimulus remains elusive. Another contributing factor is the possibility of geopolitical risk exploding. On balance, the yellow metal is expected to trade bearish in the very short term. However, overall, the fundamentals remain intact. Ballooning fiscal deficit, elevated debt/GDP ratio, geopolitical tensions, de-dollarization, purchases by central banks, etc. are likely to increase gold prices in the medium to long term.

Support is at $2650/$2635/$2600, while resistance is at $2710/$2730/$2750/$2785/$2800.

(Author Praveen Singh is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)

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