(BFM Bourse) – The precious metal has lost around 5% since the Republican's victory on November 6. The dollar suffered from the rise in interest rates and a return to risk-taking on the markets. But UBS estimates that gold could still be around $3,000 per ounce next year.
The crazy surge in gold on the market seemed to resist absolutely everything, with numerous records broken time and time again since the start of the year.
The gold rally, however, came up against a major obstacle: the election of Donald Trump. Since the Republican's victory in the presidential election on November 6, the precious metal has lost ground, falling 6% at the fixing (reference closing price) on Friday, November 15. According to UBS, this is its worst post-presidential election week since Ronald Reagan's victory in 1980.
This Monday, the precious metal regains a little bit of color, gaining 1.4% to 2,606 dollars per ounce. Since December 6, its drop is currently 5%.
Gold is thus moving against the stock markets which have clearly benefited (at least on Wall Street) from the return of Donald Trump to the White House.
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Dollar fort
Why did the businessman damage gold on the markets? The reasons seem quite numerous. Donald Trump's victory resulted in a renewed appetite for risk on the market, which could penalize gold and its eternal status as a safe haven.
“Gold's decline amid Trump's victory marks a shift in sentiment, with some investors now choosing to diversify away from safe-haven assets,” Fawad Razaqzada, market analyst at City Index and Forex.com, told Marketwatch .
Other more technical factors may have come into play. First of all, gold was weighed down by the rise in the dollar, itself driven by Trump's economic policy. In particular its desire to introduce customs duties, a protectionist mechanism which favors the greenback to the detriment of other currencies. This measure “increases the chances that ex-US dollar currencies will depreciate against the greenback to anticipate the loss of competitiveness on American markets implied by customs duties,” explains UBS.
However, as with many raw materials, gold prices are denominated in dollars. A rise in the American currency makes gold more expensive, all things being equal, for investors whose base currency is not the dollar.
“There has been a sharp return to negative correlations of gold with the US dollar,” explains UBS.
Unfavorable interest rates
In addition, Donald Trump's economic policy, including the corporate tax cut, is perceived as inflationary and likely to increase the budget deficit. The election of the businessman thus led to a surge in bond yields. The rate on the 10-year US bond exceeded 4.5% last week, which had not happened since May. Along the same lines, the market has revised downwards its expectations of a rate cut by the Fed for the coming months.
Which again penalizes gold. In theory, the evolution of the precious metal is negatively correlated with that of interest rates. The higher the interest rates, the less attractive gold is, all else being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price is consequently hit by an increase (or a lesser decrease) in interest rates, because it then becomes less and less interesting to invest your money in gold rather than investing it.
“Historically, lower rates reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive to investors. However, expectations have since (Trump's election) ) been significantly lowered (…) With real yields remaining high, the appeal of gold as an alternative to interest-bearing assets has diminished, eroding one of its main pillars of support,” explains Stephen Innes of Spi AM.
Towards a rebound?
Deutsche Bank points to another technical factor: a potential drop in demand from emerging central banks, which had purchased a lot of gold for many months. “The reasoning is simple: Trump's policies are likely to put downward pressure on many emerging market currencies, notably the yuan. By extension, many central banks must now spend their dollar reserves to defend their currencies against capital outflows and prevent excessive weakening. We have shown that Asian central banks have diversified their gold holdings. They must now spend more dollars to defend their currencies.
However, these factors may only come into play in the short term. After the recent decline in gold, UBS believes that the precious metal will rebound. The Swiss bank anticipates gold at $2,750 per ounce at the end of March, at $2,850 at the end of June, and at $2,900 at the end of September.
The Swiss bank predicts that emerging central banks will continue to buy gold to diversify their reserves in 2025. It also judges that the risks linked to Trump's political agenda on trade and public finances will, in coming months, encourage investors to buy gold to hedge their bets.
Rajeev De Mello, portfolio manager at Gama Asset Management, explains to Bloomberg that if Donald Trump creates economic and geopolitical disruptions, Chinese or Russian central banks could be tempted to buy more gold to move away from the standard-dollar system.
“Many reserve managers from 'friendly' and 'neutral' countries will be a little more concerned about a more erratic foreign policy and the implications for the security of their reserves,” he argues.
Julien Marion – ©2024 BFM Bourse
