Gold supported by cracks in market confidence

Say hello to the new market obsession

Since the financial crisis of 2008-2009, markets have been obsessed with what the Federal Reserve does or doesn't say or do. In January, the Fed was relatively quiet, giving no indications of an early 2017 rate increase. This silence has forced markets to find a second obsession: The Trump administration. It appears as if there will be at least four more years of obsessing over President Trump's actions and statements (and perhaps even more importantly, his tweets). The good news for gold is that markets are beginning to reflect reality following the irrational euphoria that occurred after the November US presidential election.

Encouraging start for gold as risks come into focus

The risks of a Trump presidency, which we have been highlighting since the election, are coming into clearer focus. President Trump broke with tradition (again) by indicating that a strong US dollar is not necessarily in the best interest of the United States. His chief trading advisor and incoming US Treasury Secretary Steven Mnuchin also made comments that were interpreted as being unsupportive of the dollar. Controversial executive orders and anti-trade manoeuvring have damaged confidence and contributed to further dollar weakness. As a result, gold and gold shares have had an encouraging start in 2017, bouncing off oversold yearend levels and benefitting from downward moves in the US dollar. Gold gained US$58.38 (5.1%) to end January at US$1,210.65 per ounce. The NYSE Arca Gold Miners Index (GDX Index) gained 13.7%.

Markets are fairly good at pricing in demand trends, earnings expectations, technology innovations and many other things. However, one thing markets have great difficulty putting a price on is uncertainty. Just two weeks in and it appears that Trump's administration will be unconventional, controversial and unpredictable. If we could measure the level of market uncertainty over the next four years, it would likely be off the charts. With interest rates still at microscopic levels and US stocks at all-time highs, gold, in our view, is an obvious investment alternative as a hedge against the potential for uncertain outcomes that may easily damage other asset classes.

Australian investors can hedge their portfolios too by investing in VanEck’s Gold Miners ETF.  Available on ASX, GDX is the world’s largest gold miners ETF and gives investors instant access to a diversified portfolio of 51 global gold mining companies in a single trade on ASX.

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