America has chosen Donald Trump to be its next President and the world markets,
whether metals, gold, bonds, equities or Forex are all highly volatile. In
fact, I got long GDX and NUGT last week for a quick 5% and 11% gain with gold
miners, a get-in and get-out type of trade to take advantage of these extreme
volatility levels.
While the initial projections were for a Brexit type turmoil in most markets,
those predictions did not prove to be correct. The markets quickly reversed
course and gave a strong Thumbs up to Trump's policies.
Trump's economic plans will increase national debt
The mammoth US debt stands at $19.8 trillion and it will increase under the
new President, considering his lenient tax cuts and plans for infrastructure
spending.
The proposed tax cuts, inclusive of accrued interest and macroeconomic effects
will increase the national debt by
$7 trillion over the next decade and by $20 trillion in the next two decades,
according to Forbes.
There is no detail on how the President-elect plans to finance these tax cuts.
Though Trump says that he will make it deficit-neutral, there are no specifics
available at this point in time.
All these will stoke inflation, which is what the investors are focused on
right now and as a result, the safe havens are being dumped, while risky assets
are on the rise.
The dollar is flying as higher inflation is likely to force the FED to increase
rates at a much faster pace than previously anticipated.
Protectionism will dent part of the above benefits
Candidate Trump had radical plans to tear long-standing trade agreements like
the NAFTA, levy taxes on the Chinese imports, etc.
However, in a highly global world, every action that President Trump takes
will have an equally strong reaction. This global trade war is unlikely to
benefit either the US or the global economy, which is already struggling with
anemic growth.
It is not clear if the US public will be happy to pay higher prices for the
imported goods. After all, offshoring has also given a boost to the American
industries, which have managed to bring down their cost of production. A costlier
iPhone is likely to reduce the demand for the product, both at home and abroad.
The markets are currently discounting only the positives and are not addressing
the related negatives that will tag along.
Without knowing the finer details of the proposed policies, the markets have
run up far ahead of themselves, leaving a very small margin of error.
The Fed is unlikely to raise rates in December
The Fedwatch tool
is projecting an 81.1% probability of a rate hike in December. I have been
advocating throughout this year that the FED will not raise rates and I believe
that this time too it will not be any different.
The FED will develop cold feet and is likely to postpone its rate hike to
March 2017 wanting to know more about the policies of the new President before
hiking rates.
If I am proven correct for the umpteenth time on the FED's action, the market
will be greatly disappointed and the dollar will fall.
With the above-mentioned uncertainties, it is unlikely that the dollar is
going to breakout of the strong overhead resistance.
The dollar has returned from the 100.5 levels on two previous occasions. In
the short-term, the dollar will face resistance from the channel line close
to 99.5 levels and also from the 100.5 levels, which should be a more formidable
resistance to cross. Hence, I believe that the path of least resistance for
the dollar is down.
Gold is in a win-win situation
Gold has always been touted as a hedge against inflation. If Trump's policies
increase inflation, gold is a winner.
If President Trump implements his trade protectionist policies, it is likely
to lead to a global economic and geopolitical turmoil, which will be even better
for the buyers of gold.
So, whichever way you look at it, gold will benefit its buyers.
The current fall in gold is retesting the strong support area of $1200/toz.
Can it break under it?
Yes, it certainly can, but the break is likely to be short lived.
The RSI has formed a positive divergence, i.e., while price of gold has fallen,
the RSI has held above the lows, which is a positive sign and a sign of a bottom.
Markets usually take off when positive divergences form at the bottom.
The Bottom Line
The speculators had accumulated short-term positions in gold, expecting a
Brexit type rally if Trump were to be elected. However, when that hasn't happened,
they are in a hurry to close their positions, which has exacerbated the fall.
Once these positions are cleared, the stronger hands are likely to step up
their purchases because gold is available on a ‘SALE'. We expect these prices
to be the lowest in our lifetimes.
Hence, be ready to buy gold in large quantities for the long-term.
