By Michael Mikolay
It has been a good year for the bulls in the first nine months of 2016, with gold up over 20 per cent for the year in trading which has been fairly orderly – meaning that your investments are not getting “chopped up” due in the sharp knives of volatility. That being said, what does the FOMC activity and the Presidential Elections in November mean for gold prices for the rest of the year? While one can safely assume that we have seen the bottom for the range for 2016, does the final quarter bring a year-end rally to top off what has already been an outstanding year?
The move higher in gold this year has been driven by several major factors:
- The financial crisis in Asia, which caused the initial rise in the price of gold
- The Federal Reserve’s reluctance to raise U.S. Interest rates
- The withdrawal of the England from the European Union (Brexit)
- The tremendous volatility in the value of the U.S. Dollar vis-a-vis global currencies.
It is instructive to note that the precious metals market has moved up in spurts followed by plateaus this year with the corrections never going below its consolidation points at the $1200 and $1300 level. It will be interesting (and important) to see if that trend continues.
The fourth quarter brings the U.S. Presidential Election and with the polls showing that the race didn’t end as expected, gold will stay reasonably well bid. Regardless of the outcome, either victor would have brought a new administration and new ideas. A Clinton presidency implied more social programs, higher taxes, government expansion and thus, a higher deficit. However, a Trump presidency brings with it a lower corporate tax rate, infrastructure improvements, renegotiated agreements, increased military spending and thus, a higher deficit.
The Federal Reserve did not raise rates in September but is almost certainly gearing for a hike in December. Although it is generally bearish for gold, the rise in the U.S. dollar and the psychological effect of this move is currently built into the gold price by this juncture. Although the buildup by the analysts will have a dampening effect on the price, the downside movement caused by this activity should be somewhat muted.
Given all this, volatility will remain high and gold should remain fairly steady and reasonably well supported. The current view of the market is to buy at signs of weakness – not sell into rallies. With the elections and the lethargic U.S. economic recovery precluding more than one rate hike (or none should the economy falter), expect gold to continue to show resilience and close the year on a constructive note, although one more selloff below the $1300 level prior to year-end would not be surprising.