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 Wednesday 23 November 2016

Gold slumps below key support

 

 

One of the many predictions ahead of the US Presidential Election was that gold would soar in the event of a Trump win. This prediction proved to be woefully inaccurate. It’s true that gold shot higher in the early hours of 9th November when it became apparent that support for Clinton was well below that predicted by the pollsters. However, by the time Clinton conceded, gold had given back most of its gains. Since then, gold has fallen sharply and, as of today’s US open, is down around 10% from its election night high. The theory was that a Trump victory would throw financial markets into turmoil. Analysts expected the dollar and equity markets to sell off sharply while gold and silver would soar on safe-haven buying. In fact, equity markets have soared since then, as has the dollar. The Dow, S&P500, NASDAQ and Russell 2000 all hit record highs this week. Meanwhile, the Dollar Index is up 6%, bursting above resistance around 100.00 to trade at its highest level since April 2003. The explanation is that Trump’s election promises of tax cuts, infrastructure spending, tariffs and immigration curbs will all prove highly inflationary. This has seen the probability of a December rate hike from the US Federal Reserve rise to 100%, according to the CME’s FedWatch Tool.
  
The dollar got another lift earlier today following the release of US Durable Goods Orders. These came in well above the consensus expectation and as the dollar spiked higher, gold collapsed. Now the Durable Goods numbers are notoriously volatile. But it is a measure of market positioning, sentiment and the shortened US trading week that the data release led to such a dramatic market move.
  
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Unfortunately, the move has created considerable difficulties as far as the technical set-up for gold is concerned. The sell-off has seen gold slump below the $1,200 support level. A break and close below $1,180 opens up the prospect of further losses - perhaps even to retest $1,080 support.
  
The problem for gold (and silver) at the moment is that investors are struggling to adjust from a market anticipating low growth, low inflation and low interest rates to one where the inflation genie may finally have been let out of the bottle. Certainly, the rally in bond yields and the dollar appear to bear this out. However, some analysts warn that the US GDP annual growth rate is still tepid. While we’ve had a slight uptick recently, it’s not yet evident that the US economy has really turned a corner. There’s a danger of a set-back if the Fed tightens monetary policy and exacerbates a recession. If that proved to be the case, then bond yields and the dollar should fall, and gold would shine again.
   
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Posted by David Morrison

Category: PM Bulletin


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