Precious Metals Watch

Precious Metals Watch
Group Economics
Macro & Financial Markets
Research
22 July 2016
Trump would be bullish for gold
 Inflation has been an important driver for gold prices…
Georgette Boele
Co-ordinator FX & Precious Metals
 …as well as the growth/inflation mix, real rates, the US dollar and safe
Strategy
Tel: +31 20 629 7789
[email protected]
haven demand
 A Democratic victory in November’s presidential elections…
 … will unlikely substantially change the US economic outlook
 Therefore, the growth/inflation mix and negative real yields will remain
supportive for gold prices…
 …as well as a negative longer-term USD trend
 A Trump victory would be bullish for gold prices
Introduction
In this Precious Metals Watch we investigate the possible impact of US elections on gold
prices. We first provide an overview on how gold behaved during previous Presidencies
and why. Then we focus on the upcoming US elections and what this could mean for gold
prices.
How did the gold prices behave during previous Presidencies?
In general gold prices perform well in the following environments:
1.
High US inflation
2.
Financial crisis/uncertainty
3.
Growth/inflation ratio below one
4.
Decreasing or negative real yields
5.
A lower US dollar
During the 1980’s and 1990’s, gold prices were very sensitive to changes in inflation
(expectations). During the Presidencies of Ford, Carter, Reagan I, Reagan II, George
Bush and Clinton I (see table below), consumer price inflation and gold prices moved in
the same direction. This means that gold was seen as a hedge against inflation.
Since the Presidency of Clinton II the behaviour of gold prices has changed. More factors
started to have an impact on gold prices such as growth/inflation mix, US economic
growth compared out potential growth, US real rates and the US dollar. There are several
reasons for this. First, during Clinton II, Fed monetary policy tightening quelled inflation
fears and resulted in a considerable rise in US real yields. In addition, the US also had a
Insights.abnamro.nl/en
2
Precious Metals Watc
ch - Trump would
w
be bu llish for gold - 22 July 2016
2
fiscal surplus.
s
This co
ombination was negative for gold prices as well as the stro
ong rally in
the US
S dollar during the EM crisis. Despite severa
al international crises during the
t
Presidency of Clinton
n II (Asia, Braz
zil, Russia, LTC
CM, DotCom Buubble, Argentin
na) the US
o
g
gold.
dollar outperformed
Gold
d’s performan
nce during different Presid
dencies
Data un
ntil the end of 20115, ** G/I = Growth
h/Inflation
Presidency
Ford
Carterr
Reagaan I
Reagaan II
G Bussh
Clintoon I
Clintoon II
GW Bush
B
I
GW Bush
B
II
Obam
ma I
Obam
ma II*
Years
1974 - 1977
1977 - 1981
1981 - 1985
1985 - 1989
1989 - 1993
1993 - 1997
1997 - 2001
2001 - 2005
2005 - 2009
2009 - 2013
2013 - 2017
Change in % Change in % Changes in leve ls
US
SD
Gold Inflation
G ** Real ratess Output gap
G/I
2
2.0
-11.4
-5.5
0.7
2.1
6.1
-0.7
6.00
-133.0
338.5
-8.6
688.0
-47.6
1.4
-1.22
1.3
0.5
-399.0
32.8
-0.6
0.00
1.7
-1.5
-00.2
-18.5
0.6
-4.33
-2.8
0.4
-44.2
9.9
-0.1
1.99
1.8
0.1
211.4
-26.0
-0.5
1.22
3.7
-0.1
-288.7
61.0
0.1
-4.22
-2.0
-3.2
0
0.5
101.2
-28.9
1.22
-1.7
1.6
-11.5
89.9
28.8
-1.66
-2.4
-1.0
166.4
-36.6
2.1
1.33
1.1
Source: Bloomberg data, ABN AMRO Grou
up Economics, ou
utput gap = IMF
Second, with inflation
n fears recedin
ng other factors
s have becomee more important. During
the Pre
esidencies of G
GW Bush I, GW
W Bush II and Obama
O
I econoomic growth co
ompared to
potential (the US outtput gap) deteriorated. During
g these periodss gold prices moved higher.
What gave
g
extra sup
pport to gold prices during GW
W Bush I and O
Obama I was th
he drop in
real yie
elds (official ra tes minus infla
ation) to negativ
ve territory.
Third, the introductio
on of ETFs in th
he gold market in 2003 has oppenend the gold market to
a wide
er public. As a rresult, investorrs could take more
m
easily pos itions in gold in
n
anticip
pation of develo
opments in fina
ancial markets. Gold prices haave increasingly become
more sensitive
s
to the
e US dollar.
During
g the Presidenccy of Obama II, the output gap and US real yields improve
ed. This
together with a sharp
p rally in the US
S dollar resulte
ed in a substanttial drop in gold
d prices
en 2013 and 20
015. However,, since the start of 2016 gold prices have rallied
betwee
substa
antially (+24% vversus the US dollar), becaus
se of a deteriorration in US real yields and
safe ha
aven demand.
Possible scenarios
s for US gove
ernment set-u
up (US analysst Maritza Ca
abezas, see
also our
o US Watch
h Clinton vs Trump)
T
Our ba
ase case is tha
at the Democrrats will win the Presidential Elections. We
e think that a
divided
d government will be the most likely outcom
me. We sketchh two more like
ely scenarios
and a low probabilityy scenario. In th
he first two sce
enarios, Hillary Clinton is Pres
sident and in
st Donald Trum
mp is President. The variants in the first and second scena
arios relate to
the las
the ma
ajority in the Ho
ouse and in the
e Senate.
mocrat Preside
ent, Republica
an majority in House,
H
Democcratic majority
y in Senate
I. Dem
Under this constella
ation there will be policy grid
dlock. We exppect that the economy
e
will
continu
ue to grow at moderate leve
els and inflation will be moviing towards the 2% target.
3
Precious Metals Watc
ch - Trump would
w
be bu llish for gold - 22 July 2016
2
Under this scenario d
debt/GDP will likely increase somewhat sin ce the econom
my will not be
able to
o reach the deb
bt targets simply by growing.
mocrat Preside
ent, Republica
an majority in House, Repubblican majority
y in Senate
II. Dem
Under this scenario ((next to most likely), Republicans have thee majority in the
e House and
e. The potenti al for policy shifts
s
is even more limited. We expect that economic
Senate
growth
h will be weake
er, but it is diffic
cult to quantify the extent giveen vague policy
y details.
epublican Pre
esident, Repu
ublican majoriity in House,, Republican majority in
III. Re
Senatte
This is
s a low probabi lity scenario. We
W think that th
he proposals m
made by Mr. Tru
ump will be
toned down once he is in office. Ho
owever, we thin
nk that the polittical risks resulting from
gh under this scenario.
s
The US
U economy w
would be more isolated and
uncertainty will be hig
trade growth
g
would b
be weaker than
n otherwise. Me
eanwhile foreiggn direct investtment would
likely be
b hurt. In this scenario econo
omic growth would be softer. The debt/GDP
P ratio would
increas
se significantlyy. The policy sh
hifts proposed would
w
cause siignificant uncertainty,
which would also we igh on the economy.
Gold prices will re
emain supporrted if Democ
crats win…
Our forecast horizon does not cove
er the four yearrs of the upcom
ming Presidenc
cy. Our
forecasts cover up to
o the end of 2017. Our base scenario
s
(with D
Democrats win
ning the
electio
ons) suggests tthat US econom
mic growth will remain below trend, improvin
ng only
slightly
y in 2017. Succh a result will be
b supportive for
f gold prices ffor the followin
ng reasons
1.
In
nflation will like ly be higher tha
an growth
2.
Real
R
interest rattes are forecas
st to remain neg
gative (less neg
egative though)
3.
The longer-term
m US dollar has
s turned negativ
ve.
These are all supporrtive factors for gold prices. However, despitte uncertainty on
o financial
markets we don’t exp
pect a new majjor crisis in the making. As a result, safe haven flows
toward
ds gold will like
ely be muted. All-in-all,
A
gold prices will likely rise a moderate pace
toward
ds USD 1,650 p
per ounce overr the coming ye
ears.
…while a Trump viictory could result in even
n higher pricees
If Trum
mp were to beccome Presidentt (low probability in our view),, gold prices will likely
perform
m well, becausse we expect th
hat his policies will be inward looking and will weaken
the fun
ndamentals of tthe US econom
my. In addition,, his rhetoric annd possibly pollicy actions
could create
c
domestiic and internatiional uncertainty at beast, andd upheaval at worst.
w
Our US
S economist exxpects that eco
onomic growth would be wea ker. This will lik
kely result in
a more
e substantial risse in gold price
es towards USD 1,850 per ouunce over the coming
c
years.
However there is a major risk fo
or gold prices
Howev
ver, there is on
ne major risk to gold prices. Gold
G
prices will aggressively sell
s of if US
real yie
elds rise and g
growth/inflation mix and the ou
utput gap improove dramatically. This
would be an environm
ment in which the
t Fed hikes aggressively
a
innterest rates (m
more than
on pick-up) beccause of strong
g (above trend) US growth. W
We think this is unlikely
u
inflatio
during our forecast h
horizon.
4
Precious M
Metals Watc
ch - Trump would
w
be bu llish for gold - 22 July 2016
2
ABN AMRO
A
precio
ous metals fo
orecasts
Change
es in red/bold
End period
p
Gold
Silver
Platinnum
Palladdium
22-JJul
1,3324
199.7
1,0096
6
682
Averaage
Gold
Silver
Platinnum
Palladdium
Q1 16
1,1181
144.9
9
975
5
527
Dec-15 Mar-16
M
Jun-16 S
Sep-16 Dec-16 Mar-17 Jun-17 Seep-17 Dec-17
1
1,450
1,233 1,322 1,425 1,350 1,300 1,400 1,425
1,061
2
24.00
15.38 18.48 21.50 19.00 18.00 20.00 22.00
13.9
1
1,400
976 1,018 1,150 1,050 1,000 1,200 1,300
894
620
600
650
700
580
625
563
597
562
Q2 16
1,258
16.8
1,004
568
Q3 16
Q
1,374
20.0
1,084
609
Q4 16
1,388
20.3
1,100
610
2016 Q1 17 Q
Q2 17 Q3 17 Q4
Q 17
1,300 1,325 1,350 1,413 1,438
1
18.0 18.5 19.0 21.0
23.0
1,041 1,025 1,100 1,250 1,350
1
578
590
675
603
638
2017
1,381
20.4
1,181
626
Source: ABN AMRO Grouup Economics
nd out more abo
out Group Eco
onomics at: http
ps://insights.a
abnamro.nl/en
n/
Fin
SCLAIMER
DIS
This document has been prepared by ABN AMRO
O. It is solely intended to provide financial annd general information on economics. The infformation in this docum
ment is strictly proprieta
ary and is being
supp
plied to you solely for yyour information. It mayy not (in whole or in parrt) be reproduced, distr
tributed or passed to a third party or used for any other purposes thhan stated above. This document is
inform
mative in nature and d
does not constitute an offer
o
of securities to the
e public, nor a solicitatition to make such an offer.
No re
eliance may be placed
d for any purposes wha
atsoever on the informa
ation, opinions, forecassts and assumptions co
ontained in the docume
ent or on its completenness, accuracy or fairness. No
repre
esentation or warranty,, express or implied, iss given by or on behalf of ABN AMRO, or anyy of its directors, officerrs, agents, affiliates, grroup companies, or em
mployees as to the accu
uracy or
comp
pleteness of the inform
mation contained in thiss document and no liab
bility is accepted for any
ny loss, arising, directly
y or indirectly, from any
y use of such informatioon. The views and opin
nions expressed
herein may be subject to ch
hange at any given tim
me and ABN AMRO is under
u
no obligation to uupdate the information
n contained in this docu
ument after the date the
hereof.
Before investing in any pro
oduct of ABN AMRO Ba
ank N.V., you should obtain
o
information on va
various financial and oth
her risks and any poss
sible restrictions that yoou and your investmen
nts activities may
enco
ounter under applicable
e laws and regulations.. If, after reading this document,
d
you consideer investing in a produc
ct, you are advised to discuss
d
such an investm
ment with your relation
nship manager or
perso
onal advisor and checkk whether the relevant product –considering the risks involved- is aappropriate within your investment activities. The value of your invesstments may fluctuate.. Past performance
is no
o guarantee for future rreturns. ABN AMRO re
eserves the right to mak
ke amendments to thiss material.
© Co
opyright 2016 ABN AM
MRO Bank N.V. and affi
filiated companies ("AB
BN AMRO").

Download Report