Why Didn’t Gold React Better to Trump’s Win?

Mike Fuljenz
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Posted: Nov 16, 2016 12:01 AM
Why Didn’t Gold React Better to Trump’s Win?

Our assumption – along with many others – was that gold would soar on a Trump victory. At first, gold exceeded $1,350 overnight, while the Dow index lost 800 points, but those markets reversed the next day and have gone in opposite directions ever since – with gold down to $1,222 and the Dow at record highs.

The main reason why gold went down is that Republican control of both houses of Congress and most governorships and state legislatures could result in serious political reform. The market assumed, based on that fact, that the economy could get humming again, which is ironically considered to be bad for gold.

In addition, some leading gold ETF investors bailed out of their position, sending gold down temporarily. The momentum trading herd seemed to switch from gold to stocks. For instance, Stanley Druckenmiller, the founder of Duquesne Capital, said he sold all his gold on election night. He told CNBC that he’s optimistic that Trump will bring deregulation and “serious” tax reform, which will stimulate the economy.

Then on Friday, gold fell further, from $1,260 to $1,230, after over 85,000 gold futures contracts, worth over $10 billion, traded on the market opening, according to Zero Hedge market blogger Tyler Durden. The seller has not been disclosed, but this looks like another knee-jerk trade out of gold and into stocks.

This is a classic buying opportunity! Some mainstream advisors agree, saying gold will come back soon:

UBS Wealth Management Research says they expect gold will be back to $1,350 within six months.

HSBC’s James Steel said strong Chinese buying will provide support for gold and limit further downside.

Citibank analysts suggested the price of gold could be set to rise further: “Possible uncertainty will still likely persist and market volatility may rise again, which may benefit the gold-as-a-safe-haven asset.”

Goldman Sachs’ chief global equity strategist, Peter Oppenheimer, advised clients to sell government bonds and buy gold because of an expected rise in inflation resulting from Trump’s policies.

BlackRock Global’s Head of Asset Allocation Russ Koesterich sees inflation as the main reason why gold will rally, writing: “To the extent that rates are being driven by changing perceptions of inflation and not real rates, higher interest rates may not be an impediment for gold.”

Gold Soared on Election Night

Gold soared on election night, but then fell the next day and each day thereafter, on the presumption that the Republican sweep of both houses of Congress and the White House would turn out to be positive for the economy in 2017 and beyond. Their assumption (probably mistaken) is that “good times are bad for gold,” but we believe that good times put more money in peoples’ pockets so they can afford more gold. Also, the current odds for a Fed rate increase in December are 81%, which tends to dampen gold’s price.

What’s Behind Trump’s Surprise Election Victory?

At one point last Tuesday – election day – the odds for Donald Trump’s victory were as low as 10%, yet he grabbed some key formerly-blue Democratic strongholds and won the electoral college vote by a commanding 306 to 232 (if Michigan is awarded to Trump). He won 30 states while Hillary Clinton won just 20 states and Washington, DC. Clinton won slightly more popular votes, just like Al Gore did in 2000, but she clearly lost in the electoral college, which has decided U.S. elections for over 225 years.

What made the difference? In order of importance:

· Democratic voters failed to show up in sufficient numbers. The last three Republican candidates (in 2008, 2012 and 2016) earned the same basic total of votes – about 60 million each time. Although 61 million votes were cast for Clinton, that is far behind the 70 million and 65 million voters for Obama in 2008 & 2012. Also, 61.6% of eligible voters voted in 2008 vs. 57% in 2016.

· The traditional Democratic base was skeptical of Clinton, giving Trump the victory. Specifically, Obama won unionhouseholds by 18 points in 2012, while Clinton barely edged Trump in union voters by 2%. In 2012, Romney got 6% of the black vote; in 2016, Trump got 8% of the black vote. The gap among women voters was static – Obama won women’s votes by 12 points in 2012, while a female candidate, Hillary Clinton, only had a 13-point edge among women in 2016.

· The polls made the Clinton camp complacent, giving her a wide lead in the polls, betting parlors, press endorsements and Web sites. The press was clearly biased and overconfident in their ability to sway the voting public. Clinton lost ground in the final week, while Trump accelerated his rallies, often late into every night. As he said, “it sure didn’t feel like we were second place.”

· Both candidates were flawed, but Hillary carried far more “baggage” than Obama. Her career of “flexibility with the truth” caught up with her. Bernie Sanders was a popular Democratic candidate and, though a socialist, seemed sincere and honest in his dealings.

The pundits will be debating this election for years, but Hillary’s belief was that it was “her turn” (for the second time in eight years). No, it wasn’t. America wanted change. Americans don’t like dynasties – of Clintons or Bushes. She seemed a distasteful candidate to many Democrats. In Michigan, for instance, 90,000 voters left the Presidential ballot blank, voting only for their Representatives. Michigan was decided by 12,000 votes.

Republicans also swept both houses of Congress, while dominating the governorships and legislatures of a vast majority of states. After this year’s election, Republicans will control both chambers in 32 states (33 if you count Nebraska, which has a single legislative chamber). Democrats control both chambers in only 13 states, with four states split.

Central Banks, China and India are Still Buying

In comparison to some U.S. gold ETF traders, physical demand is rising in China and India, while central banks continue buying, not selling, gold. According to the World Gold Council (WGC), central banks bought 81.7 metric tons of gold in the third quarter, bringing the nine-month 2016 total to 271.1 metric tons. Demand is also rising in Europe and Japan due to negative interest rates in those regions. Juan Carlos Artigas, director of the WGC’s investment research, said that a recent WGC survey of 19 central bank managers found that 17 of them (nearly 90%) plan to either increase or maintain their gold reserves.

Most of the gold buying has come from Russia, China and Kazakhstan in recent years. Simona Gambarini of Capital Economics, said in a research note that “we continue to expect central banks from developing economies to be the main source of demand from the official sector in the future, as they typically have much lower gold holdings as a percentage of total reserves compared to those in advanced economies.”

The decline in gold’s price after the U.S. election made gold more affordable in cost-conscious India and China. “Whenever there was a dip, people (in China) were buying,” said Ronald Leung, chief dealer at Hong Kong’s Lee Cheong gold dealers. Rising demand tends to cause premiums to increase. In China, dealers raised the premium from $4 per ounce last week to $5 this week. In India, gold premiums doubled from $3 to $6 per ounce, the highest in 21 months as the Indian government cracked down on smugglers.

Mike Fuljenz is the Official Precious Metals Expert for Townhall