Before the election, predictions were strong. You heard that Trump was sure to lose, and that even if he won, it would be disastrous. One of the biggest economic predictions was that the chaos of a Trump victory would guarantee huge spikes in gold value. Well, the numbers are in, and those predictions were even more wrong than late September polls.
Gold has dropped roughly 10 percent in the month since Trump was elected. While that surprised a chunk of so-called experts, the factors behind the drop say important things about the future of America’s economy.
Uncertainty
The first lesson to remember is that gold is the ultimate fallback option for uncertain markets. The more doubts investors have, the more gold rises. Now, any smart economist would have predicted that gold would stabilize at least somewhat after the election, regardless of who won, because just knowing who will run the government reduces uncertainty. Despite the obviousness of that situation, a vocal group was predicting that a Trump election would increase uncertainty and destabilization, leading to further surges in gold value.
The real result, gold’s fastest drop this year, tells us two important things. First, investors are confident that Trump will be good for the economy. Second, a large portion of media outlets and propagandists pushed a ridiculous narrative, and the results since the election have embarrassed them on many fronts. That said, it would be premature to give too much credit to a President-Elect.
Interest Rates
Interest rates are the other main reason predicting a gold soar was somewhere between ambitious and asinine. Fed hikes have been speculative throughout 2016, and even the best economists have failed to predict when rates would go up and by how much. Despite that, the Fed has made it clear that rates will rise, albeit conservatively.
The general consensus is that these inevitable hikes will have at least a short-term negative impact on the value of gold and hard currency in general. This creates hesitation that would only have been overcome by investor hysteria. Once again, we’re forced to notice that there has been no hysteria, only consumer and investor confidence.
USD
The primary reason interest hikes can hurt gold is because of how they affect the greenback. Generally speaking, higher interest rates make bonds and treasuries far better investments. So, a strong USD usually pulls money away from hard currency.
Interest rates aren’t the only factor favoring the USD right now. The year has been rife with international uncertainty. The EU continues to struggle, Asian markets have been particularly volatile and Trump is staying strong on his positions regarding international trade.
While economic uncertainty is usually good for gold, it also often draws investments back to the USD. The competition between currencies isn’t always enough to offset the value of one over the other, historically speaking, but the sheer number of factors strengthening the dollar right now make it easy for investors to choose between the two. The real question is: when will it change?
The Future
At least until Trump can actually sign a bill or declare a policy, trends probably won’t change much. A December Fed hike is still possible, but it would only further entrench the short-term strategies.
When the scope is extended to the next four years, predictions fast become murky. Trump has made it clear that he wants to effectively devalue the USD to reduce America’s trade deficits. This could lead to at least a small rebound in gold.
Additionally, interest increases usually only have a short impact on gold values. Over the long haul, they help push healthy inflation, and gold rarely lags behind.
Furthermore, anticipating the state of the EU over the next four years is extremely sketchy. Populist movements are gaining steam internationally, and Brexit could be the first of several secessions. That kind of uncertainty is traditionally good for gold, and if Trump is simultaneously succeeding with his trade plans, a rebound is possible.
The point is that gold values are speculative at best right now. Bold investors might try to buy low, but successfully predicting the next bottom point is more of a wild guess than a legitimate strategy.
In the end, the declining value of gold is borne of good news. Economics in the U.S. are not just stabilizing, they’re growing, and they’re showing signs of a major surge. The predictors of doom have been proven wrong on every front, and the potential for swift positive change is the highest it’s been in over a decade. The loss of gold value may have hurt some investors, but it’s a trend that speaks loudly of hope and potential for the next few years.
Regards,
Ethan Warrick
Editor
Wealth Auhtority
