Gold In The Headlines (a different perspective)

 Investors Ditch Gold After Trump’s Win  (Wall Street Journal 14Nov2016)

“Investors piled into gold when polls showed Donald Trump’s chances for victory were improving.  Now that he has won the presidential election, they are selling.”

It is true that the US dollar price for gold increased as much as three percent on foreign markets when early election results here in the US indicated a substantial improvement in President Elect Trump’s odds.  However, at that particular time, it likely heightened – in some people’s eyes – the possibility of a contested election.  As the evening wore on, and it became apparent that Mr. Trump would win the election,  the uncertainty lessened and prices retreated from those higher levels.  By early morning at the opening of the US markets the price of gold was back to where it closed the day before.  The entire activity was pretty much a non-event.

Markets hate uncertainty.  We had been told that earlier poll results pointed to a Clinton victory.  My guess is that if the situation were reversed we would very likely have seen the same thing happen.

As far as the magnitude of the changes, keep in mind that US markets were closed.  This is a factor for several reasons.  The US is, by far, a bigger market with more impact.  Foreign markets are more thinly traded.  And the activity was probably attributable to a few speculators and/or hedgers.  Certainly not the result of “investors piling(ed) into gold” in the middle of the night.

Now that he has won the Presidential election, they are selling.”

Really?  I doubt that.  And, furthermore, we would likely be seeing similar price action if Hillary Clinton had won the election.  The selling that has taken place after the election was confirmed is a continuation of the selling that had occurred since July/August when gold traded as high $1360/oz.  And it has been amplified further by increasing strength in the US dollar.

Rising bond yields make gold a less-attractive prospect for investors, as the metal pays nothing to its holders.”

During the 1970s interest rates continued to rise to levels thought previously unbelievable.  The 10-year US Treasury Bond was yielding as much as 15%.  Meanwhile, gold kept rising.  The “rising bond yields”  did  not “make gold a less-attractive prospect for investors”.  The higher the bond yields went, the higher the gold price went.  If anything, the higher bond yields provided further incentive to buy gold.

Higher bond yields translates to lower bond prices.  Bond holders during the seventies saw their principal declining faster than any interest they were earning.  It is not about the interest rates.  It is all about the US dollar.

Dollar Roars to Life After Election”  (Wall Street Journal 15Nov2016)

Suddenly, the dollar is back in fashion.”

Not so suddenly as it may appear.  The US dollar had been gaining in value since August 2011 when gold peaked at $1900/oz.  That changed in January 2016 when gold traded as low as $1040/oz. The dollar continued to weaken and gold continued to strengthen until July/August when gold traded at $1360/oz.  The weakness in the US dollar up to that point reflected concern and uncertainty about the US Presidential election.  Since that time, the dollar has been showing signs of strength and the price of gold has retreated. After the US election results were confirmed, the dollar has continued to strengthen.

Any strength in the US dollar, actual or perceived, albeit temporary, is reflected (inversely) directly in the price of gold.  As far as the price of gold is concerned, it does not matter whether interest rates are rising or declining; or whether the economy is weakening or growing.  Nothing ’causes’ the price of gold to change EXCEPT the changing valuation of the US dollar.  They are inversely correlated.

Headlines have a purpose.  That is to get your attention.  As a result they can be quite inflammatory and emotionally charged. The article content should support the nature of the declaration and provide additional confirmation.  Sometimes it does not.  And sometimes, it is simply incorrect.

 

 

 

 

 

 

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