Gold took an upward spiral over the first half of April as geopolitical worries took center stage. US president Donald Trump’s standoff against Syria, Afghanistan and North Korea bolstered apprehensions about further escalation. Unless geopolitical events have immediate economic or financial consequences, their impact on gold is minimal and brief. Gold prices ended the month of April with a gain of 1.5% but continued correcting lower in the early part of May. Fund Outlook Markets still seem to think that the Trump presidency will produce aggressive tax cuts and infrastructure spending.
But the fact is, the impatience over Trump’s fiscal stimulus is growing, which may hamper the bullish trend in risky assets and strengthen gold. Although reflation trade may stay in place, the enthusiasm about Trump’s economic agenda should decline. Trump managed to boost confidence in the US economy. However, if he does not translate it into real actions, the market sentiment may reverse, driving risky asset prices down, while supporting gold.
There’s still a high degree of uncertainty and lack of clarity about what Trump might do, and also to what extent he’s going to be able to do what he has said he wants to do. The current tax changes being proposed by him will probably morph over time and will be significantly watered down if it is ever to become law. Therefore, since the final plan will be significantly diluted from the proposed form, its effect on the economy and for equity prices will be extremely attenuated.
Since last November, we have cautioned against such euphoria and we continue to believe that the stock market will break down once it is clear that these expectations will not be met. In the short term though, gold remains vulnerable to the downside as Fed monetary tightening gains pace. We believe that the fundamental outlook for the gold market may not be so encouraging until people expect Trump’s reflationary forces to mend the economy. But, as markets lose their faith in the pro-growth policies of Trump or if there is a financial turmoil given the stretched equity valuations; it will force the Fed to adopt a more dovish stance and gold should start moving northwards.
What could prepone gold’s ascent would be aggressive Trump policies that cause turmoil in currency and asset markets and this uncertainty would drive people to assets like gold. The world is in great disequilibrium, both with respect to the global economy and geopolitics as well. There exist more uncertainties than certainties in the global macroeconomic environment of which Trump’s presidency is a big unknown. We believe that barring the near term, gold prices should start moving gradually upwards in 2017.
The writer is senior fund manager, Quantum Mutual Fund