Since the day that President-elect Donald Trump unexpectedly won the U.S. elections, the sliding gold price has signaled an unanticipated risk on investor mood. Instead of money flowing to safe-haven investments like gold, it appears that the markets are instead taking confidence from the end of uncertainty over who will lead the U.S. economy into the year 2020. As of November 14, gold was trading at a five-month low, dropping as low as $1,214 per ounce after spiking to just over $1,300 in the immediate aftermath of the elections. Whatever the political implications, it appears that the markets sense that a bull is set to take charge of the economy and they are positioning for the changes to come, meaning that the safe-haven trade on precious metal is less attractive compared to other prospects. The lower gold price could indicate that a period of more optimistic sentiment lies ahead, transforming the bearish mood that’s prevailed since the sub-prime crisis hit the U.S. and world markets in 2007. However, it may be a bit too early to say that the short-term outlook for gold is downward, and a lot depends on what happens in the next two months.
Challenges for gold bears are waiting in the wings over the next two months until Trump is inaugurated as president. Gold prices are influenced by the Federal Reserve’s stance, which is still dovish even amid expectations that an interest rate hike is imminent by the end of the year or in early 2017. If Federal Reserve Chair Janet Yellen pulls the trigger on an interest hike in December, gold bears will likely count this as a win and the price may lose further ground. The opposite scenario also holds water at this point; should Yellen stay dovish and U.S. interest rates stay as low as they are currently, then the gold bulls could seize opportunities to drive the price back up. Investors are set to focus strongly on updates on U.S. GDP growth and better performances in the job sector, and the results for November and December are likely to have a sharp impact on the gold price.
The developments over the next couple of months are also key for bond yields in the first quarter of 2017. If Trump’s economic policies start boosting U.S. jobs and growth, monetary tightening could be just around the corner, meaning higher U.S. interest rates and bond yields, and less attraction towards the non-yielding gold investment. Even so, it’s a significant consideration that Trump’s infrastructural and tax cut plans may lead to a higher budget deficit and inflation levels, prompting investors to consider gold as a hedge just in case—Score for the gold bulls in this scenario.
On the political risk side, we don’t know a great deal about Trump’s foreign policy in concrete terms. Additionally, outside the U.S. there are more political risks building; after the Brexit vote and uncertainty over U.K.-EU relations, other European member states are facing tough times. Italy is set to hold a constitutional referendum on December 4, and there are elections in Germany, France and Austria in 2017, each featuring a right-wing candidate. All these factors could act to push the gold price up, so the bullish case for the yellow metal still exists, even in a world of rising interest rates.
Trump’s presidency could also impact the price of crude oil, at least judging from his overall policy of boosting U.S. businesses through deregulation. Question is, can deregulation make a significant difference in the U.S. shale oil industry? In light of high production costs versus reduced revenues amid the last two years of low prices, regulation appears to be the least of the shale industry’s problems. The short-term major influence on worldwide crude oil prices still lies with OPEC and the prospects of a supply-cut deal at the end of November. Even the recent fall in WTI crude to below $43 per barrel seen in the wake of the U.S. elections is more strongly linked to OPEC’s negotiations and reduced expectations that a deal can be reached that satisfies all the cartel’s member states.
Long-term, Trump’s policies may gain influence over the oil price if he decides to dissolve the nuclear proliferation agreement with Iran, leading to a drastic cut in output from the OPEC member country. This would dovetail with OPEC’s drive to cut supplies and raise prices, and while it would be a messy process to reverse President Obama’s executive order, it could be achieved. Given the worldwide glut, the oil markets are receptive to production cuts of all descriptions, so we could see price hikes in this scenario.
The political risk premium is an unknown factor for crude oil in the long-term, particularly when it comes to Trump’s relations with and policies towards the Middle East. While the U.S. elections may be over and that period of uncertainty has ended, the president-elect’s foreign policies towards external oil-producing countries are still wild cards that have yet to be played. What is certain is that OPEC and the U.S. are boosting production to record levels, with data from the EIA showing that oil production increased to 8.69 million barrels per day (bpd) in the first week of November, up 170,000 bpd from the previous week. Meanwhile, the U.S. rigs’ count continues to climb even amid the bearish market conditions.
Crude’s fundamental market conditions of lower demand amid an over-supply do carry a lot of weight with investors; but it’s always worth remembering that fundamentals can be brushed aside in favor of wildfire sentiment and animal spirits at the most inconvenient of times. Relying on fundamentals as the sole predictor of the oil price could be risky considering the uncertainty that lies ahead with a new president at the helm of the world’s largest economy.
Hussein Sayed is the Chief Market Strategist at FXTM.