The increase in the price of gold has risen due to Donald Trump’s Presidential election. Gold has risen to ~$32/oz to $1,307/oz and silver +$0.39 to $18.75/oz. Originally, the markets were pricing with a Clinton victory, which forecasted at $1,325/oz in Q4/16 and $1,450/oz in Q1/17 and silver $18/oz in Q4 and $19.20/oz in Q1/17. We will briefly discuss why we believe Trump’s victory will have a positive impact on the price of gold.
His economic plans include the fiscal easing of corporate taxes from 35% to 15%. His plan also includes increased spending along with protectionism and scrutiny of the current trade deals and shaking up the Federal Reserve.
Trump’s policies will cause inflation that will put pressure on real rates in spite of higher nominal yields. Strategists expect his victory to result in 35-40bps of 10-year term risk premium stretching to an anticipated additional Treasury budget deficit, increased monetary uncertainty and higher inflation.
We believe that real rates will stay under pressure as the US expectations of inflation increase faster than nominal bond yields. Gold is conversely compared to real rates.
Overall, USD is expected to weaken. Experts have shown USD diminishing against JPY, CHF, SUR and GBP in the Trump master plan, while USD has strengthened against CAD and MXN on NAFTA risk. The backbone of Trump’s policies has been to bring back jobs that have gone overseas and it’s believed this will weaken the USD, especially against the Chinese RMB. A weaker USD and the potential for competitive currency devaluations looks good for gold pricing and could stimulate higher central bank demands.
We forecast $1,438/oz in 2017, on average, with $1,450/oz in Q1/17 is driven by low real rates, macro uncertainty, demand in wealth preservation, and whether central banks buy or decline mine supplies.
Stocks: NEM and ABX are best positioned with the highest US exposure to lower taxes and MXN cost exposure is also positive. Along with positive view on NEM and ABX, both will benefit from Trump’s proposal of a 15% corporate tax from 35% due to US exposure (~51% of mine-site FCF for ABX and 45% for NEM). The highest exposure to MXN is AGI (~50%), GG (~20%) and AEM (~11%). As of date, the rise in gold rates have been stable and with the continued increase, we can expect highly influential names to outperform in the short-term.
We believe stronger financial asset qualities are the main driver for silver pricing. Primarily, international capital movements toward safer asset categories, higher geopolitical risk premium, and ETF influx. SLW is the top pick.