By Jordan Finneseth, Kitco
(Kitco News) – The gold rally has been on hold since the re-election of Donald Trump, with the yellow metal retesting support at $2,600 as traders take profits and rotate into stocks and cryptos. But with multiple headwinds still facing the global economy, analysts at the World Gold Council think the pullback is only temporary.
“The first week of November saw gold move lower after hitting a new all-time-high on the first of the month,” World Gold Council analysts wrote in their latest commentary.
“According to our Gold Return Attribution Model (GRAM), gold was pressured lower by strength in the US dollar and momentum factors, including the lagged gold price, gold ETF outflows which were coming off an exceptionally strong month, and a drop in COMEX net managed money net longs – reflecting the likely unwind of pre-election hedges,” they said.
Gold’s price also took a hit due to withdrawals from exchange-traded funds (ETFs), which “shed an estimated US$809mn (12t) during the first week of November, with the bulk of outflows stemming from North America, which were partially offset by strong Asian inflows,” the report noted. This potentially signals “renewed fears around the resumption of the trade war between the US and China. Additionally, COMEX net positioning also fell 74 tonnes, an 8% drop from the prior week.”
“The US election results have taken a bit of a knee-jerk sting out of gold’s impressive y-t-d rally,” the analysts said. “Suggested reasons are a continued strengthening in bond yields and the US dollar, risk-on sentiment in equity markets, a boost to cryptocurrencies, and a quelling of geopolitical tensions.”
“These factors might presage a welcome pause, even a healthy near-term retracement, for gold,” they added.
While there was some speculation that “the pre-election run-up in Treasury yields and the US dollar might have been exhausted and that a turn in the dollar might lead bond yields lower – as it has done on several occasions over the last two years,” the analysts noted that “the Republican sweep has gone hand-in-hand with an acceleration of the run-up in yields and a quick reversal higher in the dollar index as well – driven by a sharp and nervous move lower in the euro and yen.”
Regarding the recent rallies in bond yields and the dollar, the WGC said there is a “confluence of factors at play.”
These include “Positive US economic and inflation surprises” and “Expectations of a Trump victory, with inflationary policies including tariffs, tax cuts, cuts to immigration, and high levels of spending.”
Another factor is “A rising term premium whereby investors saddled with US Treasuries need higher yields to be enticed into holding them,” they added, along with an “Overly dovish outlook as positioning in Treasury and US dollar futures had become somewhat stretched.”
“Added to the dollar and yield impact are concerns that cryptocurrencies are now currying more favor with the incoming US administration,” the report noted. “And equity markets, particularly in the heavily weighted technology sector, have been given a further boost from expected ‘business-friendly’ policies.”
One final development that is currently weighing on sentiment toward gold is “murmurs that sanction risks might have been reduced given the incoming administration's purportedly less combative stance,” they said. “Yet despite these headwinds, we believe there’s still fundamental support for gold. And if it’s a retracement, we don’t expect it’ll develop into a rout.”
To support their bullish outlook in the mid-to-long-term, WGC analysts underscored that “Gold has been taking fewer cues from US yields and the dollar of late with most of the returns in October (as well as during much of 2024) taking place during Asian trading hours.”
“Some of this buying may have been ‘sanctions-related,’ but central bank buying slowed in Q3, so it’s likely investor-led too,” they noted. “And now, Trump’s tariff policies have the potential to put more pressure on Asian equity markets. The weakness in China’s CSI300 index has been one factor contributing to stellar gold investment demand in the country during 2024.”
“The fiscal policies under a Republican sweep are likely to be inflationary: tariffs, immigration policy, tax cuts and a desire for low borrowing costs (although strictly, this fall under the independent purview of the Federal Reserve) have the capacity to weigh on inflation readings,” the report said. “In addition, excessive deficits will continue to exert pressure on the creditworthiness of US Treasury bonds, a suggested driver alongside sanction risks of global central bank gold demand.”
For bond investors, the approximately 4.5% nominal yield available for long bonds “will probably continue to look insufficient, given inflation’s smoldering embers and the continued positive stock-bond correlation,” the WGC said.
And while stocks continue to hit new records, the analysts noted that “Equity markets are already richly valued” and said, “Any adjustment to valuations from expected favorable tax policies should be priced in quickly.”
“Should there be a cut to the CHIPS and Science Act, for example, that would likely result in a downward adjustment to the technology elements of the US equity indices,” they warned. “If the administration doesn’t roll back those expenditures, deficit concerns will continue to pose an issue and that is – all else being equal – gold-friendly.”
“In summary, gold’s negative reaction to both the US election results and a continued move higher in bonds yields and the US dollar is, in our view a near-term phenomenon,” the report concluded. “Other drivers, including lower sanctions risks, a renewed bullishness in equity markets and cryptocurrencies mask the underlying – and in our view – more fundamental concerns of: A world where protectionism is likely going to be more acute and current conflicts see no signs of abatement; Equity markets are heavily concentrated and richly valued during the end of a business cycle; Cryptocurrencies continue to be a marginal consideration and not a replacement for gold; and Western investors have, outside of futures, not added much gold this year and so there is unlikely a slew of sellers in the wings.”
Comments