Gold Suffers as Irrationality Trumps Reality

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Gold Suffers as Irrationality Trumps Reality PART 1 OF 8

How Will Gold (and Everything Else) Perform Under Trump?


The markets have gone into fantasy mode since the U.S. presidential election. U.S. stocks reached new all-time highs, the U.S. dollar has soared, copper has had a parabolic rise, interest rates are up substantially, and gold has tanked. All of these strong moves indicate the market is pricing in a rosy scenario in which projected Trump tax cuts, infrastructure spending, and regulatory reforms ignite robust economic growth that enables the Federal Reserve (or the “Fed”) to normalize rates. This outlook works against safe haven assets1 like gold and bonds. While we are hopeful for such an outcome, it will be very hard, if not impossible, to achieve in reality.

Market’s Positive Response to Trump Unexpected, Gold Suffers Under Pressure

We know of no one who forecasted such a market response to a Trump victory. We thought a Trump win would be positive for gold, and it was for about an hour when gold rose $50 per ounce as news outlets began to declare a winner. However, gold quickly reversed course along with other markets. Redemptions in gold bullion exchange traded products (or ETPs) began the day after the election and continued through month-end. The selling pressure caused gold to fall below important technical levels. For the month, gold declined $104.05 (8.2%) to $1,173.25 per ounce. Gold stocks took their lead from gold bullion, as the NYSE Arca Gold Miners Index (GDMNTR)2 dropped 14.9% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)3 fell 15.1%. For the year, gains have been trimmed to 10.5% for gold bullion, 52.9% for GDMNTR, and 78.8% for MVGDXJTR.

While lower fourth quarter gold prices will likely put a dent in the profits of many mining firms, the industry remains in good health. Third quarter results were positive, as Scotiabank’s universe of gold stocks reported production is 2% ahead of expectations and all-in sustaining costs (or AISC) came in 5% lower than estimates. The bear market forced the industry to reorganize around lower gold prices. With AISC averaging roughly $900 per ounce, companies are well positioned to weather the current downdraft in gold prices.

Market Realist

Will gold prices continue to head south?

The trade-weighted US dollar index, or the broad index, which measures the value of U.S. dollar against other world currencies, was up 1.2% when Donald Trump was declared president-elect on November 9, 2016. The dollar has recorded an average growth of 3.3% since November 8. The currency’s appreciation anticipated growth and the December Fed rate hike. All of this is bad news for gold.

How Will Gold (and Everything Else) Perform Under Trump?

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Gold prices dipped 0.1% on November 9. Prices have fallen at an average rate of 6.6% since November 8. Gold prices, which had breached the $1,300 per troy ounce mark in early November, closed below the $1,200 mark on November 23, falling 7.6%.

The VanEck Vectors Gold Miners ETF (GDX) tracks the NYSE Arca Gold Miners Index. It gained 2.6% on November 9 and started falling the next day. Prices have fallen at an average rate of 10.8%.

How Will Gold (and Everything Else) Perform Under Trump?

The drop in price and volume of the VanEck Vectors Gold Miners ETF is evident in the graph above.

How Will Gold (and Everything Else) Perform Under Trump?

The VanEck Vectors Junior Gold Miners ETF (GDXJ) tracks the MVIS Global Junior Gold Miners Index. It has almost mirrored the VanEck Vectors Gold Miners ETF.

When the world at large was expecting gold and bonds to triumph due to the election, Trump actually reversed expectations. The market seems to have opted more for uncertainties than gold. The first-ever Fed rate hike of the year on December 15 sent prices plunging 3% to $1,126.9. Bank of America Merrill Lynch expects gold prices to touch the $1,200 mark by mid-2017. Credit Suisse expects gold prices to remain below $1,400 in 2017.

In this series, we’ll examine other expectations and surprises that may come from the Trump victory.

  1.  Safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence.
  2.  NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
  3.  MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

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