Before the U.S. presidential election analysts pointed out that Trump’s administration would be positive for the yellow metal, because of the elevated general uncertainty, possible geopolitical turmoil (due to trade wars or recalibration of foreign policy), slower economic growth (due to protectionism), as well as widened fiscal deficits and higher inflation (due to tax cuts and higher government spending).
In this edition of the Market Overview, we will analyze these issues in greater detail. We will focus immediately on the foreign policy’s impact on the gold market, while in the next parts we will examine the relationship between Trump’s domestic policies and the shiny metal. Although gold reaffirmed its unquestionable position as a safe haven during election night, investors should not count on this channel only. It’s true that Trump is less likely to continue with the status quo, and no one really knows what to expect from the new administration. Investors do not like vagueness, so they may refrain from making investments or turn into safe havens, such as gold.
However, this lack of clarity should be already priced in. Moreover, Trump’s rhetoric and, thus, the reception of him, should soften after the harsh campaign. And if anything, uncertainty should now only decrease along with finding out the successive details of economic program and completing the new administration. Indeed, this is why we see fast and furious asset reallocation after elections – when Trump won, it became clear which assets should benefit from such an outcome, so investors started to recalibrate their portfolios. As the chart below shows, Trump’s rally led in particular to a rout in both bond and gold markets (and to increase in profits of those who had been holding short positions in precious metals, like our subscribers). The rise in bond yields (the decline in bond prices) reflects the rise in risk-appetite.
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