Gold Could Fall to $2,500 Before “Trump Trade” Euphoria Subsides

Market Insights Post-Trump Re-election

In the aftermath of Donald Trump’s re-election, gold and silver markets have shown signs of struggle. Analyst Nicky Shiels, who leads research and metals strategy at MKS PAMP, elucidates that the current bullish case for precious metals is being sidelined as market euphoria takes center stage. With global uncertainties, such as the prospect of World War III receding, the sentiment in the market is burgeoning, leaving precious metals like gold in a precarious position.

Shiels noted the surge in optimism across various asset classes, highlighting that “animal spirits have been reawakened.” Stock markets have witnessed significant gains, with the S&P 500 index approaching the 6,000 threshold while Bitcoin eyes the $100,000 mark. In stark contrast, the precious metals markets have seen a dip, indicating a shift in investor confidence.

The Similarities to Trump’s First Victory

Analyzing the current market dynamics, Shiels drew parallels between the aftermath of Trump’s 2020 victory and his 2016 win. She emphasized the “Washington trifecta,” with Republicans holding a majority in both the House and the Senate, which tends to reward higher-risk trades such as Bitcoin and tech stocks.

Shiels illustrated that the current market response mirrors that of 2016, where the US dollar gained around 2%. However, the yield on US Treasuries increased by a mere 10 basis points this time, in stark contrast to a 40 basis points increase observed in 2016. U.S. equities have surged in just a week, achieving more than five percent gains quickly, showcasing an overall bullish sentiment.

Commodity Price Reactions

A vital part of Shiels’ analysis was the price reaction from key commodities. Gold, down five percent week-over-week, aligns with trends observed in 2016, where it eventually bottomed at a 12% decline post-Trump’s first election. This could imply a potential floor for gold prices closer to $2,420 or its 200-day moving average, although Shiels cautions that such a projection might signify an excessive overshoot.

Silver and platinum are currently reflecting similar trends, as silver is projected to fall to around $28.50, with platinum expecting to dip below $900 based on similar trends from 2016. Moreover, palladium’s performance deviates from expectations, currently down 11%, contrary to the anticipated rise.

Looking Ahead: Gold’s Price Forecast

Shiels provided a forward-looking outlook for gold prices, targeting $2,500 per ounce. She mentioned several tactical headwinds affecting gold, including the absence of negative news, the removal of the US election premium, and a transition in investment preferences toward equities amidst rising performance from traditional Trump trades. Additionally, recent Chinese stimulus efforts appeared lackluster, failing to ignite a rush toward gold in the Chinese market.

Furthermore, geopolitical calmness and potential peace deals between Russia and Ukraine have diminished risk premiums that generally bolster the appeal of gold. While inflation risks loom, the current economic conditions suggest a restrictive environment, exacerbated by rising US dollar values.

The Shift in Market Dynamics

Shiels articulated that the market landscape for gold has shifted from a bullish “escalator-up-elevator-down” mode to a more neutral or bearish “escalator-down-elevator-up” stance. As investor positioning adjusts in response to gold’s current downturn, she indicated that although the immediate future for gold prices may see declines, a longer-term bullish outlook remains.

“Longer-term bulls or sidelined investors should stay the course,” she advised, noting that while short-term price movements may be shaky, the long-term target for gold remains $2,500 per ounce.

Conclusion

In summary, Nicky Shiels’ insights underscore a significant shift in market dynamics following Trump’s re-election. The optimism surrounding traditional “Trump trades” has overshadowed the precious metals market, leaving gold and silver amidst a repricing phase. As market euphoria continues to dominate, investors should brace for potential short-term declines in gold prices, while maintaining a longer-term perspective on its value. With structural conditions unchanged, the focus for gold traders should remain on navigating through the current market turbulence as they seek optimal entry points moving forward.