Gold price drops again – $1,200 in sight

Gold dropped to a near six-month low on Monday as the post-elections slump continues and financial markets try to make sense of what a Donald Trump presidency may mean for interest rates, economic growth and inflation.

Gold for delivery in December dropped to a session low of $1,212.00 an ounce, the lowest since the beginning of June in already heavy early morning trading on the Comex market in New York. Gold is now down more than $120 an ounce after an initial surge on Tuesday as results showed a likely Trump victory.

"A big fiscal stimulus at this stage of the economic cycle is much more likely to boost inflation rather than real economic growth"

Gold bears are making big bets that Trump's plans for fiscal stimulus, including a $500 billion infrastructure spending program, will lead to strong US economic expansion and a number of prominent hedge fund managers and billionaires running family offices have moved aggressively out of gold and into stocks.

Gold bulls point to likely inflation arising from deficit spending by a Trump administration, burnishing gold status as a hedge against inflation and geopolitical uncertainty boosting gold's allure as safe haven asset.

In a note Simona Gambarini, commodities specialist at Capital Economics, says gold is likely to benefit from a Trump presidency for four reasons:

  1. In an economy where the unemployment rate is below 5%, a big fiscal stimulus at this stage of the economic cycle is much more likely to boost inflation rather than real economic growth.

  2. Should Trump go ahead with his protectionist policies on trade, there is a real risk of a trade war. Significant tariffs on imports would hurt US domestic real incomes and retaliation by other countries will negatively impact exports.

  3. Trump’s foreign policy poses substantial geopolitical risks, especially in the Middle-East given his views on Isis, Syrian and Iran which could boost demand for safe havens.

  4. Trump has often stated that he would be in favour of a gold-based monetary system, similar to the old gold standard. While not a likely scenario, it would boost demand for gold.

Gambarini says "the prospect of a big deficit-funded fiscal stimulus is likely to push inflation well above the Fed’s 2% target, meaning that even if the Fed raises rates more aggressively, real interest rates should remain low.

Capital Economics house view is a gold price of $1,450 by the end of next year.

Gold price drops again – $1,200 in sight