Sunshine Profits

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Sunshine Profits is built around the belief that we are in a secular bull market in all commodities and that precious metals will be among its greatest beneficiaries. Having established long term trends, our investment strategy focuses on evaluating low-risk entry points, as well as timing potential tops.

SPDR Gold Shares (GLD): Will End of Trump Rally Support Gold?


The so-called “Trump rally” appears to have run its course. What does it imply for the gold market?

As everyone knows, gold prices plunged after Trump won the presidential election. The free fall lasted until the very beginning of 2017, when the price of the yellow metal started to rise. From the fundamental perspective, the main reason was that the U.S. dollar pulled back after the explosive “Trump rally” ran out of steam. The chart below shows the January’s depreciation of the greenback against the Japanese yen.

Chart 1: The USD/JPY exchange rate over the last 12 months

USD/JPY exchange rate

Also, real interest rates corrected, as one can see in the second chart. The strong negative correlation between them and the price of gold still holds.

Chart 2: U.S. real interest rates (blue line, left axis, yield of 10-year inflation-indexed Treasury, in %) and the price of gold (red line, right axis, London P.M. Fix) over the last 12 months.

U.S. real interest rates and the price of gold

Some analysts believe that gold is likely to rally in the near future, as the Trump rally faded. Surely, the markets’ response to Trump’s victory was probably a bit exaggerated. And the investors’ focus will be now not on Trump’s promises, but on delivering on them.

However, the reason behind the recent rally in gold may be different. It may be the case that investors decided to build up a hedge against the inaugural address and the first days of policy actions. Remember Brexit and the U.S. presidential election? The uncertainty about these two events supported the price of gold, but when it vanished after they unfolded, gold prices went south.

A lot depends on what Trump will say and what his first decisions will be. If the history from the last year repeats, we should see the end of the relief rally in gold- at least unless Trump triggers World War III.

 

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