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Donald Trump was elected President and the gold price surged 5%, over $60, from $1,271/oz to $1,336/oz. As many of us had suggested it would. And then something strange happened, something not expected by the majority of market participants â it started to fall, the dollar strengthened.
We now have a gold price that is down 13% since the US election result â from a high of $1,336/oz to a low of $1,177/oz this morning. This is a drop of 13% in just 13 trading days since the election.
Does this mean that Trump and his Presidency isn’t going to be very bullish for gold prices as so many of us predicted? Does this mean that gold is going to underperform  or worse, enter a bear market in the next four years?
We don’t think so. Indeed, we see this as extremely unlikely. We outline below just some of the factors that have lead to the recent declines in the gold price, and outline why we don’t think this is a sign of things to come.
US dollar strengthens as Federal rate hike looms
For many in the gold space the miserable gold price is thanks to the expectations that Janet Yellen and co. will decide to hike rates thanks to some mixed data that suggestes a strengthening US jobs market. These were the noises emanating from the recent Federal Reserve Open Markets Committee meeting press release.
The US Dollar has rallied to its highest level since 2005 this week, largely on the back of these Fed expectations. Higher borrowing costs can hurt gold bullion as strategic buyers look at gold in the context of yields and interest payments. Although this is less the case now given ultra loose zero percent and negative interest rate monetary policies.
ETF support gone ⦠for now
In 2016 gold demand has been supported by stellar ETF demand as, according to the World Gold Council, the high gold price in Q3 had a negative impact on gold demand, elsewhere.
For the SPDR Gold Trust and the iShares Gold Trust combined inflows are worth around $13.6 billion for this year (a record).
Both jewellery and gold bars and coin sales have reached levels this year not seen since 2009. But physical demand has not reflected such levels in Q3. After very significant demand and the price surge in Q1 and Q2, Q3 saw a reduction in demand for jewellery and coins and bars.
Whilst central banks, which have been huge buyers (and therefore supporters) in the physical gold market, have reduced gold reserve diversification to 33% of that in 2015.
âETPs were the only bright spot during the quarter, with 146t of inflows helping to counterbalance weak demand elsewhere, notably in jewellery (-21%), bars and coins (-36%) and purchases by central banks (-51%).â
But that bright spot has started to dim since the Trump’s victory:
According to ETF.com âin the week since the election, outflows from the SPDR Gold Trust and the iShares Gold Trust totalled $1.7 billionâ¦the aftermath of the elections has clearly dampened enthusiasm for gold among ETF investors.â
Therefore it is unsurprising that a market that has been significantly supported by one investment product is now struggling as the outflows add up.
But the ETF argument raises an interesting point
As the World Gold Council stated in their recent report, much of the activity surrounding gold purchases this year (especially in the area of ETFs) shows strategic buying rather than investment buying.
This was no more clear than on the early hours of the election night on November 9th, as Jim Rickards recently outlined,
âGold prices surged late on Nov. 8 and into the early morning hours of Nov. 9 as a Trump victory became clear. This was exactly in line with my expectations. Based on sentiment and momentum, gold should have held those gains.
Instead, one of the largest and most visible individual gold investors, Stan Druckenmiller, decided to liquidate his enti