Donald Trump’s election, combined with Republican majorities in both the House and Senate, clearly marks a new direction for U.S. government policy. Given that U.S. government policy and actions are a dominant factor in the world economy, it´s important to take stock as to how the policies of Trump’s presidency might affect markets and, therefore, your investments and speculations.
Firstly, let’s examine how markets reacted immediately following Trumps election - below is a snapshot of how certain commodities and major markets moved last week:
Dow Jones up 4.5%, copper up 10%, Nickel up 13%, Oil about even, Gold down 5.5%, Silver down 5%, and the 10-year Treasury yield up 20%.
Many of these weekly percentage changes are significantly greater than average weekly variations. Some of these moves may provide meaningful indications of what might occur as Trump’s policies take effect, while others are probably short-term head fakes and less indicative of longer term trends.
It will take time for the dust to settle and the longer term implications to become clear, however in the meantime here is a snippet of short-term action in the gold market:
If you followed the gold market last week, you’ll have noticed gold’s negative reaction to Donald Trump’s election (contrary to what the vast majority of analysts expected). On Friday, the gold price punched below the technical support level of $1,250 which initiated a chain reaction of stop losses, further exacerbating the decline. Gold closed the week at $1,225.
The charts now suggest a strong possibly gold experiences a test of $1,220 to $1,200 (see the chart below), a very key support level where we have seen significant buying in the past. $1,200 is a level that warrants close attention:
As a result of the selloff in gold, mining stocks have suffered in a similar fashion and a key support level at $22 on the GDX was broken to the downside. There is strong multi-level support between the here and $19, so investors should watch to see if signs of accumulation/buying support eventuate here to confirm the technical case that $1,200 may provide the low on this corrective leg we have been experiencing since mid-June.
After a week like the one we’ve just experienced, it’s also pertinent to step back and look at the bigger picture, as shown below in the weekly chart. It’s important to keep in mind that if $1,200 is hit on this down leg, gold would still be up 15% from the yearly lows of $1,050 we experienced just 10 short months ago.
Furthermore, history tells us that in the gold market it is quite common to experience sizable corrections (often 50%) following first leg of a new bull market. The classic example is the major bull market of the 1970´s, where gold initially rose from US$35 in 1970 to an initial peak (in terms of a monthly close) of $183 in 1974 before correcting a perfect 50% to $109 by mid-1976. After this correction, gold went on to reach a height of $850 before the bull market was done, almost 680% higher than the $109 low of the 1976 corrective leg.
Source: Chart from MacroTrends.com. Annotations by the article author.
Interestingly, although the time frames involved are different to the 1970’s move, $1,200 represents an almost perfect 50% retrace from the yearly high of $1,370 we saw in July of this year.
The gold market is starting to look extremely oversold, so what does this mean for gold focused investor? For those with a more aggressive investment philosophy, a stomach for buying dips at support levels and a strong conviction that gold is going higher in the long term, the next few weeks may offer up a good buying opportunity. For those with a more conservative approach, waiting for confirmation of a low in this down leg is a more suitable approach.
Beyond gold, there have been some strong moves over the past week in base metals (a subject which deserves its own dedicated Sprott’s Thoughts), with copper and nickel both experience double digit percentage gains. Keep a lookout over the next few weeks as I hope to release my thoughts on the sector technicals in due course.
If you have any questions about the topics discussed in this article, feel free to contact the author of this article, Sam Broom, at sbroom@sprottglobal.com, or contact your Sprott Global Broker at 800-477-7853.
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