The surprise and historic US elections brought in certain uncertainties with Trump winning ,but as we all know financial markets can be unpredictable and at times confusing,Gold corrected from a high of 1338.3 to 1211 from election day ! It corrected 9.5 % within 4 trading sessions . Dow Jones industrial average recovered from a low of 17418 to a high of 18918. USD gained and hit 3 month’s high putting pressure on Gold.
But is it really the true picture ? If previous history is to be considered than the cheering of market maybe a bit premature. The new President has a history of creating controversies and given his racist comments during the Election campaign there may be surprises currently ignored by market participants.The speech made after the elections was that of accommodative fiscal policies with emphasis on government infrastructure spending.This will definitely increase inflation and in turn interest rates thereby reducing the allure to buy Gold. In his Presidential debate he had stated and criticised FED for holding the interest rates too long. He also reiterated the fact that he favoured a low interest rate regime. If the FED has to increase rates in December isn’t it already factored in prices ? Also his stated foreign policy where he wants to impose a 45 % tariff on imports from China can be bad news for low inflation numbers currently reported.His intent to ban certain caste from entering US could pose a problem from security point of view and can be supportive for Gold prices. We know that he is an unknown commodity with no prior experience of running the Government and this itself makes me uneasy. Has the markets discounted the negatives too fast ?
There has been a major event across the Globe which could in my opinion better explain the fall in Gold prices. The 2nd largest consumer of gold in the world ,India,is facing some challenges as the current Prime Minister tries to weed out Corruption from the system. He has introduced Demonetisation of the current prevailing currency.If we look at the Indian culture than corruption and black money was a part of their every day life with affluent sections of the society buying gold in order to save on taxes and use their un reported income. The purchasing power of this section will definitely reduce with current drive. Also small towns and farmers used to buy gold for marriage season which has already started with cash but due to capital control measures they would have to reduce their purchases. It remains to be seen how the whole event plays out but one thing is certain the physical demand for the glittering metal will certainly reduce in the long run in world’s one of the biggest consumers of the metal !