Trump’s election victory has tempered demand for the yellow metal

A desire to hold “real assets” in turbulent times has massively boosted the popularity of gold-backed exchange traded funds (ETFs). But following the biggest political upset of the year — Donald Trump’s US presidential victory — gold prices have gone into reverse.

After a brief rally following last week’s election result, gold ended the week down 5.2 per cent at $1,234.50 a troy ounce as the dollar rallied, and investors ditched traditional haven assets. In contrast, gold rose by $100 a troy ounce in the two weeks following the Brexit vote in June.

That was a disappointment for investors in the yellow metal, who have ploughed a record $64.5bn into gold-backed ETFs this year, according to the World Gold Council. In the third quarter, 78 per cent of the inflows were into European-based products according to their data.

The direction of future gold prices greatly depends on whether that investor flow stabilises — and, if not, whether demand from India and China, the two largest consumers, could help support the price.

Gold is still up 16 per cent this year in dollar terms, and 36 per cent measured in pounds. That compares with a return of about 12 per cent for the FTSE 100 index (with dividends reinvested) and about 4.68 per cent for the FTSE All-World Index.

Global markets avoided the feared “Trump slump”, with equities rallying on hopes the president-elect would boost spending and growth in the US economy. But gold could still benefit from his plans to boost infrastructure, according to analysts.

“Mr Trump’s policies could result in bigger public deficits, this could mean higher inflation and be supportive of gold,” says Jim Steel, an analyst at HSBC in New York.

Political uncertainty is also not going away. Investors in Europe are now turning their attention to elections next year in Germany and France, according to Alistair Hewitt, head of market intelligence at the World Gold Council.

“In Europe, we’ve got a very active political calendar next year and investors are thinking about the implications of that,” he said.

Still, the outlook for gold is likely to be heavily determined by the central banks — especially the Federal Reserve.
ECB policymakers are widely expected to extend their quantitative easing scheme by six months in December. The possibility of a US rate rise in the same month — which markets had been discounting before the election — now looks a distinct possibility. If the Fed goes ahead with a second increase, this could hit gold prices (rates rising will mean a stronger dollar and that is usually associated with falling commodity prices).

Another concern is that actual physical demand for gold in the form of jewellery and gold bars remains weak in the two largest consuming nations of India and China. Consumer gold demand fell by 22 per cent in China in the third quarter and 28 per cent in India, according to the World Gold Council.

Still, the two countries are likely to buy if the price of gold continues to dip, according to Mr Hewitt. A fifth of consumers in China and a third India are waiting for a further price dip according to their surveys, he says.

“If the price does dip there are plenty of consumers in the two large markets who will dive in,” he says.

Gold demand in China could also pick up ahead of the week long New Year holiday next January, when most Chinese return home with gifts. A property downturn in the country could also shift money to gold, according to analysts at Goldman Sachs.

James Butterfill, head of research at ETF Securities in London, remains convinced that ETF demand is relatively stable. The company has seen $4.3bn of inflows into gold products this year, with only about $110,000 going into products betting that the gold price will fall, he says.

That is different to gold’s last rally between 2007 and 2012, when there were strong investment flows into products that benefit if the gold price declines, he says.

“Investors are buying and holding on to gold,” he says. “The contrarian in you could see this as a great contrarian trade but it is driven by a lack of faith in monetary policy and political uncertainty.”