Why Gold Prices Fell Last Week?

There are many explanations why gold prices plunged after the presidential election. We wrote about the future of the gold market on Tuesday, but let’s dig into these issues one more time and discuss the outlook for gold.

The two most popular theories why the price of gold fell after Trump’s surprising victory and what it implies for the future of the precious metals market are as follows:

• On the one hand, some analysts, including famous investor Stanley Druckenmiller, say that Trump’s victory marks a significant shift in gold fundamentals. They point out that Trump’s administration will provide important fiscal stimulus, which will revive the economy, or at least the stock market. This is why Druckenmiller sold all his gold during election night – he believes that Trump’s massive infrastructure spending and tax cuts will benefit stocks. In short, the next presidency implies the end of the environment of low growth, low inflation, and low interest rates. Importantly, bond yields are supposed to increase faster than expected inflation (due to the more hawkish Fed, the curtailed foreign demand for Treasuries and the expected growth in fiscal deficits and public debt), which would be negative for the gold market.
• On the other hand, other investors believe that the decline in gold prices was only temporary and resulted from the change in market sentiment. The stock market surge is considered to be only a ‘relief rally’. Hence, the decline in the price of gold was only temporary due to the eased uncertainty after a conclusive election and softened Trump’s stance. These analysts argue that it is unwise to extrapolate the one-week trend for the future and that investors will realize soon that Trump’s policies are harmful to the economy in the long-run, which will ultimately benefit gold.
• There are also other theories. Some believe that the recent sell-off in gold had nothing to do with fundamental changes, but resulted from the unwinding of the massive long position of speculators. Others argue that Trump will trigger inflation, which would be positive for commodities and precious metals as well.

We will analyze the impact of Trump’s presidency on the gold market in more detail in the upcoming edition of the Market Overview. But let’s write a few words, which reflect our stance. We do agree that markets may be too optimistic about Trump’s presidency right now, which simply results from previous exaggerated fears. Therefore, the trumpeted reflation and the end of low interest rates may be premature. On the other hand, there were some signs of structural change even before the presidential election. And very often we hear about ‘temporary’ declines from people who simply cannot accept the bearish reality. Wrongly or not, the market sentiment has changed and precious metals investors should adjust accordingly (investors can find technical and other position-related hints in our Gold & Silver Trading Alerts). Now, a lot depends on Yellen congressional testimony. If she does not share the markets’ enthusiasm about the future impact of Trump’s policies, the price of gold should rise. On the contrary, if she signals that she is fine with Trump’s policies and the Fed hike in December, the slide in gold prices may continue.