Markets are still trying to figure out how a Trump administration will impact the U.S. economy and global trade. For now it seems the markets are pricing in more inflation down the line as the U.S. might spend more on infrastructure and cut taxes – two moves that are likely to boost growth (although the former has the potential for a stronger impact on GDP growth than the latter). But gold and silver, so far, continued to slide even though the uncertainty in the markets has picked up. Let’s look at the recent developments in the markets and what it means for bullion moving forward.
Since the U.S. elections we have seen a sharp rise in long term interest rates, which was mainly due to the expected higher inflation in the markets:
As you can see in the chart above the 5-year forward inflation expectations rate has climbed over 2% for the first time this year and the highest level since the middle of 2015. And now the markets has basically priced in close to 100% (95% to be exact) chance of a hike in December, as derived from the implied probability. Chair Yellen also pointed out that we could see a rate hike relatively soon. So even though inflation is rising, gold and silver are not. This goes to show that for many bullion traders it boils down to LT interest rates as the prime factor moving the demand for precious metals and not inflation expectations – especially at the current low levels of 2%. If we were to see inflation pick up to hover above 5% (which seems very unlikely any time soon) this could raise the argument for higher demand for gold and silver due to higher inflation.
For now, this means as long as interest rates continue to slowly increase, this could further drag down bullion price. This week, however, is a short one in the U.S. given Thanksgiving holiday, which means less volume of trade; as such, this could also give a breather for bullion. But over the coming weeks if we were to keep hearing plans from President elect Trump to invest more and cut taxes, the market will interpret it as higher inflation ahead — leading to rising interest rates.
Finally, keep notice that the market is also looking into the 2017-2018 monetary policy: The markets are starting to raise the chance for more hikes in 2017 than estimated earlier. Moreover, considering Yellen isn’t expected to continue as Fed Chair by February 2018, the newly appointed FOMC chair is likely to be more hawkish than Yellen, which is expected to lead to even higher yields – another move that will diminish the demand for bullion.
Precious metals could still see more downward pressure as move forward as long as the market keep raising the chances of more hikes in 2017 and anticipate higher inflation – two interconnected trends. This week, however, doesn’t include many news items and will be a short one so the markets are likely to keep notice of news coming out of Washington and experience low trading volumes, so gold and silver may end up moving in an unclear trend in the coming days until the markets return to full swing by next week.
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