The gold market has been showing some signs of life in recent trade, and the possibility of a bottom being put in appears to be on the rise. That being said, however, the gold market remains vulnerable to additional selling pressure. Further dollar strength, rising rates and robust appetite for risk may all potentially weigh on the yellow metal for the foreseeable future.
The countdown is on, and President-elect Donald Trump will be taking office in less than two weeks. Markets have shown a significant reaction to the Trump victory, but the real test will be seen in the coming weeks and months.
Equity markets have risen sharply on the notion of lower taxes and significant fiscal spending. Interest rates and the dollar have also been on the rise, as Trump’s policies are seen as being inflationary.
What remains unclear, however, is exactly what the incoming Trump administration will and will not be able to accomplish. Even in the most recent FOMC meeting minutes released last week, the Federal Reserve seemed more hawkish yet also made it pretty clear that there are a lot of unknowns that could potentially affect monetary policy. They did not, however, mention Trump by name.
Investors will want to see rapid progress being made on Trump’s policies, and any signs of congressional gridlock or a smaller fiscal spending package than is currently expected by markets could potentially halt the current rally in its tracks.
Even with a large boost in fiscal spending, some analysts are questioning just how much of an effect it may have on overall economic output. In the Fed’s most recent projections, the central bank is now forecasting GDP growth of 2.1 percent versus its September forecast of 2 percent.
Although the central bank said that those projections are subject to change, for now it appears that the central bank is more concerned with upside risks. Some analysts felt the Fed minutes were the most hawkish in years, but it is important to keep in mind that with many potentially significant changes on the horizon the path of monetary policy could be a rocky one. After all, it was not long ago that four rate hikes were expected in 2016, yet the central bank only saw fit to raise rates once.
The gold market could potentially be in the midst of a long-term bottoming process, and it’s possible that a bottom has already been reached.
With the new incoming administration comes potential changes in both economic and geopolitical policy, and gold could possibly provide investors with a degree of comfort. There are a number of issues that have the potential to rattle markets and drive a flight to safety including a possible trade war, negotiations with Mexico over a border wall and U.S./Russian relations.
Although risk assets may remain in favor for the time being, investors will be watching both the data stream and any changes in policy closely. With the current bull market in stocks already very aged, there exists the possibility of a significant asset reallocation that could potentially send gold on its way higher in a multi-year bull market.