Has Trump killed the gold rally?

Donald Trump’s success at the polls has sparked a surge for the riskier things in life, leaving behind some of the safe havens which have proved so popular in the first-half. Is gold due a bounce or is this just the beginning of a major sell-off?

Source: Bloomberg

Gold enjoyed an incredible first-half of 2016, with the precious metal gaining approximately 25% in the first six-months of the year. The break higher from a falling wedge pattern took years to come to fruition and pointed towards a prolonged period of strength to come.

Gold is an interesting market to trade as it serves few everyday purposes other than jewellery. From a market perspective, it has been traditionally seen as a hedge against inflation, deflation, currency devaluation, alongside geopolitical and macroeconomic risks. Interestingly, the second-half of 2016 has actually provided a significant degree of risk, with the Brexit and Trump votes. However, the price of gold, seemingly didn’t get the memo, falling over 7% in the second-half to date.

Haven or other forces?

The difficulty with gold is that while it has always been perceived as a haven for trading purposes, that label has been waning, leaving many to struggle as to what exactly drives price action. Despite some claims otherwise, it is clear from the graph below that gold has been trading largely based upon its haven status and the market’s attitude to risk. Three of the most commonly heralded ‘safe havens’ are gold, the yen and US treasuries. The correlation is clear to see below, with all three havens turning lower from July peaks. Crucially, we have seen all three sold heavily in the wake of the US election result. Given the gains we have seen in both the US dollar and US stock markets, there is reason to believe we are seeing a risk-off move here.

Seasonal factors

Gold is something which has typically been seen as a cyclical market, with events such as Indian wedding season dictating the peaks and troughs of the year. However, despite Indian wedding season taking place between September and January, the chart below highlights that recent years have seen gold sold into year-end. Will we see this trend continue in 2016?

Donald Trump’s dollar drive proves detrimental

Gold is priced in US dollars and as such, the value of the greenback will have a significant impact upon gold valuations. The graph below highlights the fact that at times of extreme dollar strength, the price of gold typically suffers. This is clear from what we are currently seeing over recent weeks.

What this tells us is that another leg higher for the dollar will likely drive another sharp move lower for gold. With the dollar index back at a crucial resistance level (100.78), there is the potential for a bullish breakout from the 22-month range the dollar has been trading within. Should that occur, we could see another sharp appreciation in the dollar, thus driving the price of gold lower. 

Technical outlook

Crucially that all adds up to the gold chart itself, which is within proximity of a crucial support level, $1200. The weekly chart highlights the fact that we came within just $12 of the $1200 handle this week, with the 200-week simple moving average (SMA) seemingly providing support. The key here is that if we see the dollar index break through 100.78, then it is likely we will see gold break $1200. Should that occur, the long term uptrend instigated earlier in the year is over. A break below this critical support level could lead to a significant period of downside for gold.

The four-hour chart shows that while we have gained ground since the lows of $1211, we are seeing gold trade within a rising wedge pattern. This is traditionally bearish when found in a downtrend like this. As such, there could be further downside to come, pointing towards a potential challenge of the $1200 level.

Ultimately it comes down to risk attitudes, with gold moving in tandem with the yen and treasuries. With Trump gaining the presidency, the expectations are for greater investment in infrastructure projects, lower taxes and lower benefits. That is perceived to be good for the economy, driving a clamour for both US equities and the dollar. With gold so close to the critical $1200 level, a continuation of this current risk-on mood could kill off the 2016 rally. Time is running out for it to escape the clutches of $1200.

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