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Gold Trumping Stocks!

04 November 2016

 
In our market update last week, we noted that longer term investors should look at a gold price close to AUD $1650oz as a gift, and one that they may wish to take advantage of sooner rather than later, with signs that the “correction in the USD gold price may be petering out”.
 
Dated 27th October, this turned out to be a good short-term entry point, with the yellow metal rallying since, now trading at closer to AUD $1700oz, whilst in USD terms, it has headed back above the important USD $1300oz mark.
 
Silver has also rallied, now back above AUD $24oz and USD $18.30oz respectively, up close to 5% in the last week alone.
 
Unquestionably, the key ‘market-event’ that has caused the turnaround has been the developments in the US presidential election, and specifically, the re-opening of investigations by the FBI into the affairs of Hillary Clinton as regards her private email servers and the potential mishandling of classified information.
 
This development has caused a dramatic re-pricing in election odds, with the likelihood of a successful run by Donald Trump clearly less of a ‘black swan’ than it appeared just a few short days ago.
 
It has also led to losses on the majority of stock markets the world over, including in Australia, where the local ASX 200 is down close to 2% in the last few trading days.
 
On the flip side of that, defensive, highly liquid assets like gold have been bid up, with the price of the yellow metal moving strongly back above its 200 day moving average (which was close to USD $1,275oz), a replay of the Brexit scenario where we also saw gold play its safe haven, store of wealth role.
 
Just how important the developments involving the FBI and the Clinton investigation have proved to be when it comes to the gold price is seen neatly in this overnight graph, released by the World Gold Council.
 
Correlation is not necessarily causation as they say, but the graph highlights the lift in the gold price, and how neatly it aligns with the narrowing in the odds between Clinton and Trump.
 

 
Despite the noticeable improvement in Trumps odds next week, many forecasters are still calling for a Clinton win, with the team over at Five Thirty Eight seeing a 65% chance of a Democrat victory were the election held today.
 


Five Thirty Eight run a handful of regular forecasts, some of which are based purely on polls, whilst others rely on the economy and historical data too. All are pointing too a Clinton victory right now.
 
Other forecasters aren’t quite so sure, with a recent article in Business Insider pointing out that previous states like New Hampshire were potentially ‘in-play’, with Trump closing the odds rapidly in the last few days.
 
The chart below highlights how the odds between Clinton and Trump have changed in the past few months, with a once seemingly certain Democrat win looking more like a line ball call today.
 

 
This tightening of the polls in New Hampshire is in many ways reflective of what has been happening across the nation, and in particular the key battleground or swing states like Florida, Ohio and Nevada, most of which Trump will need to win in order to get the keys to the White House.
 
It goes without saying that despite what the wild swings in the polls may indicate, the only poll that counts is yet to be held!
 
What next for Gold
 
The World Gold Council made a couple of other points in their recent US election centric update regarding the precious metal market, including the observation that; “the fact that the gold price has fallen only slightly below US$1,300oz, despite a more hawkish-than-expected statement from the Federal Reserve yesterday signaling that they will likely increase interest rates before the end of the year, is also very significant and shows the degree of momentum in investor demand for gold.
 
Momentum, a fickle beast, is no doubt an important factor here, as it played a significant role in the weakness we saw in USD gold prices between 2013-2015, but it is now on the side of the bulls, and will likely help support rather than suppress prices going forward.
 
Inflation (nearly always a friend of the yellow metal) also appears like it may be starting to rumble, as per the chart below, which shows a notable increase in forward inflation expectations.
 
As Jared Dillian (whose article contained the graph below), noted, both candidates for the White House will end up pushing policies that are inflationary, with Trump’s coming via the potential tariffs he wants to impose on a range of imported goods.
 
Hillary on the other hand will end up creating inflation be it via the cost of additional regulation and compliance, whilst her planned expansion of the welfare state, and possibly warfare state if her stump speeches about Russia are anything to go by, plus her desire to tinker with Obamacare will also foster inflationary pressure.
 
 
 
On a shorter-term basis, our latest weekly technical and precious metal positioning report sees short term targets for gold extending to USD $1313oz and USD $1321oz respectively.
 
Speculative money, which had retreated from the scene in the last few weeks also tentatively dipped its toe back on the long side of the gold market, with CME positioning in the week to October 25th seeing 1.25 million ounces of net buying come into the market, over 900,000 ounces of which was fresh managed money longs. We’d expect next weeks CME update to show another increase in net longs.
 
In Australian dollars, targets for gold extend as high as AUD $1734oz, whilst for silver, it would be no surprise to see prices extend toward USD $19oz, which would mark an impressive though not unexpected rally from the recent corrective lows.
 
Price moves up toward the USD $1320oz or AUD $1734oz levels may actually end up being slightly conservative if those commentators who predicted a $100oz “Trump premium” in the gold market should “The Donald” win the White House end up being correct, though its at least partly priced in now we believe.
 
After all, the low for last month (using PM Fixes) for gold was at around the USD $1252oz level in mid October, right around the time that the gap between the likelihood of a Democrat win over the Republicans had reached “Peak Clinton”.
 
Gold is already USD $50oz higher than those levels – so it’s possible that something like half the “Trump premium” may already be priced into the gold market already.
 
Final Thoughts
 
Perhaps the best thing that can be said about the US election is that it should (contested results aside) be over within a few days. Irrespective of which candidate you prefer, or dislike least, it’s safe to say that it has degenerated into a farce.
 
That Clinton and Trump are the two supposedly best candidates to hold the highest office in the land of the supposedly most enlightened society on earth reflects incredibly poorly on what was once (and in many ways still is) a truly great nation, whose people are infinitely better than its politics.
 
From an investors point of view, whilst there is a potential short-term trade to be made in the gold-market depending which way you see the results playing out, it’s all just noise to those of us with a medium to long-term view.
 
The bullish thesis for physical gold does not rest on who sits in White House, or which candidate might end up in the Big House for that matter. After all, no matter who wins the presidential race;
 
  • Central banks are still committed to extreme (and extremely ineffective) monetary policy
  • Global debt levels continue to rise, with a close to USD $20 Trillion bill sitting on the desk in the Oval Office alone
  • Stock market valuations are stretched, with US stocks trading at close to 25 times CAPE
  • Bond yields are still close to record lows, despite the recent pick up
  • Political uncertainty is on the rise, with nationalist anti-trade and globalization parties gaining in popularity across Europe and the rest of the developed world
 
It is difficult to see a strongly bullish argument for traditional financial assets with these headwinds, none of which change next week as a backdrop.
 
As such, we will finish this market update with the very same quote, and the very same simple message that we used to begin our most recent update; “In a bull market, you should either be long, or sitting on the sidelines waiting to get long”. Precious metals are in a bull market.
 
Any investor wanting to build a robust portfolio that can withstand the challenges that will surely come in the years ahead as the global economy navigates this period of rising political uncertainty, as well as the extreme macro, market and monetary challenges we face should take note! 


Until next time,
Jordan Eliseo

Disclaimer
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