Gold at the Dawn of a new Presidential Cycle
The price of gold was expected to benefit from the surprise Trump win, and it did immediately after, with a jump towards the September high near 1340 dollars per ounce. The rally lasted just three hours, then the course reversed and the former downtrend resumed with a sharp fall below the 1250 mark.
Why, then, the sentiment that had pushed higher what is considered as a safe haven, turned to bearish so fast? The projected investments in infrastructure promised by Trump, sparked purchases of industrial metals, bonds yield went up, and so the dollar, not a friendly environment for gold.
What could we expect, from a cyclical point of view, for the next course of gold in the new Presidential Cycle that is about to begin in 2017?
Much depends on the Dollar. There is generally an inverse relationship between the course of the U.S. Dollar and the price of Gold. When the value of the Dollar decreases, Gold tends often to appreciate. The common wisdom suggests that a falling Dollar increases the value of foreign currencies, and so the demand for commodities including Gold. A weaker Dollar is also potentially inflationary, so when the U.S. currency lose its value, investors look for alternatives to store value and Gold is one them, maybe the most significant. A glance to Figure 1 gives an idea.
Figure 1: Trade weighted Dollar Index (in green) and the price of Gold (in red) 1996-2016. Source Tomaselli-Vivanti Analysis – Chur
Figure2: correlation coefficient at 6 months calculated on 26-weeks returns between the price of Gold and that of the Trade weighted Dollar Index (DXY). Source Tomaselli-Vivanti Analysis – Chur
The chart in Figure 2 shows the value of the correlation coefficient calculated between the weekly returns of Gold and Dollar index at 6 months since 1971. During these 45 years, the coefficient stood in negative territory most of the time with some exceptions, most notably between 1990 and 1993 and 2009. So, if the strength in the U.S. Dollar is likely to translate into weakness for Gold, then it is reasonable to consider the Dollar cyclicity during the presidential term as a good indication for Gold. The single returns in each presidential mandate of Dollar and Gold since 1973 are shown in the table in Figure 3. The background is red for the Republican administrations, blue for the Democrats. A look at the table confirms the opposite sign of the returns between the two, as a result of the mostly negative correlation described above and shown in the chart in Figure 2. Whether the president is a Democrat or a Republican doesn’t matter so much.
Figure 3: Performance of Dollar Index and Gold for each presidential mandate since 1973. Source Tomaselli-Vivanti Analysis – Chur
Noteworthy, by the way, is the persistence of the trend during a presidential mandate. It is quite rare that the trend set by Gold, or Dollar as well, during the first year of the presidential mandate reverses its course in the three years that follow. 1973 is an exception, but the president was replaced just in coincidence with the trend reversal (Nixon impeachment).
Figure 4: the best presidential terms for Gold since 1973. Source Tomaselli-Vivanti Analysis – Chur
Figure 5: the worst presidential terms for Gold since 1973. Source Tomaselli-Vivanti Analysis – Chur
At the end of November 2016 Gold is still subdued by bearish mood that had started from the trend reversal of 2011 when it reached $1,900 per ounce. The sharp rebound of the second half of 2016 has not yet been enough to decree a trend reversal while the low at $1,045 still represented a critical point.
Figure 6: the price of Gold in US dollars per ounce 2002-2016. Logarithmic scale. Source Tomaselli-Vivanti Analysis – Chur
Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.