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U.S economy growth and FED rate hike expectation will outweigh the gold shock after U.S president election.


Figure 1: Gold price D1 chart

Gold price built up in the first week of November amid U.S election outlook. Afterward, gold soared sky-high at $1337.16/Oz when Donald Trump claimed his victory on 8th November. However, the interesting reality is that gold turned away and dropped since the day after. The commodity slightly recovered on November 24th, but the bearish trend maintains until now. At the moment, gold is traded at $1170.70/Oz (Thursday 4:21am GMT), the lowest since February. Partly, market has stabilized after absorbing the plan of the new U.S president who will be officially in administration in January next year.

The outlook for gold in the next few days depend on the Italian referendum outcome, which may boost the price in short term. However, in the long term, positive economic growth in the U.S and its rate hike expectation will push the price lower. The Asian gold market also faces some headlines that keep the gold price low as well.

Trump’s effect

After Republican Congress had approved Donald Trump’s plan and some of the Ministry of Finance members were assigned, the chaotic outlook was gone. Analysts started to have faith in his tax cut and deregulation policies.

Both of his policy schemes aim at companies’ productivity and improvement. Hence, healthy companies drive economic growth, and the stock market will be more attractive than gold. One expects stock price increases while gold going the other way.

As a strong supporter of free market, he also proposes repealing the Dodd-Frank Act in order to expand the lending system and boost growth. The Act was in action during global financial crisis in 2008, and is believed to prevent bank from overusing its power and doing business without transparency. However, opposition to the regulation like Donald Trump believes that limiting banking activity and risk is also hindering growth at the same time. Market expects expansion of financial asset from deregulation will result in the price of gold, a physical and non-financial asset, to be even lower.


Inflation outlook

Most of Trump’s policies are inflationary. For example, restricting outside labor will drive up the wage. Restricting free trade will also lead to goods price increase. Gold price may benefit from such change when these policies kick in.

OPEC meeting output came yesterday is also a factor that will send inflation expectation higher. The organization has reached to an agreement within its member and also non-OPEC party such as Russia to reduce crude oil output. Price, hence, will be higher when the output surplus is balanced. Inflation which goes the same direction with oil price, is certain to increase, because oil is the major input the any business.


U.S Economy Factor

FED rate hike expectation

The cause of gold’s current downtrend mainly comes from the market expectation to a FED rate hike after the FOMC meeting held 13th-14th December. The current probability of rate hike tracked by CME Group is 94%, almost ensure a rise to the interest rate range from 0.5% to 0.75%. Since gold bears no interest, it is expected to be less attractive in the short term future compared to interest-yielding asset who benefit from the change.


USD and the U.S Economy


Figure 2: Dollar Index daily chart (USDX D1)

Inflation expectation and rate hike expectation also raise the value of USD. Recently, USDJPY hits a 9.5 month high at 114.439 on Thursday. The Dollar Index spot (DXY) on the same day is at a high level 101.50. The index has been increasing since November beginning thanks to both market events and U.S economy fundamentals. On Tuesday, U.S preliminary GDP Q3 report shows 3.2% growth, exceeding the forecast of 3% and higher than last quarter of 2.9%. ADP also report November non-farm payroll sharply rose at 216,000 jobs. The forecast value was merely 161,000 and last month’s figure of 119,000. The U.S economy will face a series of economic data from Thursday to Friday, including ISM Manufacturing PMI, Unemployment claim, Hourly Earning, and Non farm employment by Ministry of Labor. Traders expect the data will help confirming the healthy state of U.S economy.

Strong greenback will negatively affect gold price. At the same time the recovering economy shifts the market preference toward risky asset.


Italia Referendum

A new coming factor to the gold market is the Italian referendum. A recent poll shows that 41% of the result was “No”, compared to 34% of the “Yes”. The voting topic is whether to accept a proposal of new economic policies made by the prime minister. If people didn’t approve, he would resign from his position. This factor shakes the economic and political foundation of Italia, the 3rd largest economy of Euro Zone. As a result, demand for safe haven asset like gold may benefit from the short term shock and even long term consequences, though they are not clearly material yet.


The Asian side.

Meanwhile, gold price dipped slightly on Thursday in Asia because of positive Chinese economic data. CFLP’s manufacturing PMI in November reported positive growth from 51.2 to 51.7. The forecast value was only 51. November Non-manufacturing PMI also increased from 54 to 54.7. These upbeat signals direct investors away from gold and to riskier asset.

However, Indian market, the main source of gold demand globally, said gold import could fall by 60-70 tones in the next two months. Indian government has launched the program to swap about 86% of its currency note. The policy negatively affect the gold demand during wedding season as people are short of money to buy gold – a typical gift in India. Gold price is expected to be dragged down.

Analysis of Group Fiinvesting

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