Donald Trump’s landslide victory in the US Presidential elections led to a sharp decline. gold prices While traders booked profits, some selling emerged due to concerns about a possible increase in the US fiscal deficit due to Trump’s stance on encouraging US growth; This would lead to massive borrowings, which would push up US yields. Healthy risk appetite also puts pressure on the metal.

Borrowing from the US will put upward pressure on US yields and support the US Dollar Index. In addition, proposals for tax cuts would also increase U.S. borrowing, as his planned tariffs on trading partners are unlikely to finance the resulting fiscal deficit. Both the budget deficit and the debt/GDP ratio are expected to increase further with inflation.

Despite gold packing hard on the way to the top US elections Looking at these factors alone, the metal is currently bearish as uncertainty around the outcome resolves and markets embrace its growth vision, at least for now.

Spot gold closed at $2684 on Friday, losing 0.82%, as the US Dollar Index rose despite lower US yields. The metal lost almost 2% for the week.

US Dollar Index and returns:
On November 6, the US Dollar Index rose to 105.44, its highest level since July 3, as rising yields supported the Index. The index closed Friday at 104.95 with a gain of 0.42% and completed the week with an increase of approximately 0.70%.

After sharp rises before the election, US bond yields softened towards the weekend as the US Fed cut the Fed Funds rate by 25 basis points to a range of 4.50%-4.75%. Its 4.48% for the week – its highest level since July 1 – was down around 2% on Friday, losing 0.85% to close at 4.30%. Per week. At 4.25%, 2-year US bond yields rose nearly 1% on the week.

ETF:
Total known global gold ETF assets fell for the fifth consecutive day on November 7 to 83,661 MOz; Its holdings were below the 83.969Moz level recorded at the end of the previous week.

Data and event summary:
US data released in the week ending November 8 was largely encouraging. While the University of Michigan confidence data (pre-November) announced on Friday came as 73 (predicted as 71), one-year inflation expectations of 2.60% fell behind the expectation of 2.70%.

ISM Services (October) reported earlier in the week stood at 56, above the forecast of 53.8, as ISM prices paid were slightly higher than expected. Unit labor cost (pre-Q3) was higher than forecast at 1.90% as even previous data was revised sharply higher from 0.4% to 2.40%. Weekly unemployment claims remain at pre-Covid levels.

The US Federal Reserve reduced interest rates by 0.25%, in line with expectations. The Fed President said that this was not a policy signal and that the Bank could adjust the rate of interest rate cuts as needed.

The Bank of England cut its benchmark interest rate by 25 basis points to 4.75% as expected, but the Bank warned that the UK’s budget inflation would be hit, meaning it cannot cut interest rates too quickly unless necessary.

Upcoming data and event:
Next week, investors will closely monitor the US CPI (October), PPI (October), developments in retail sales (October) and industrial production (October). China’s house prices (October), industrial production (October), retail sales (October) and real estate investment and sales (October) will also be on investors’ radar. Investors will also be interested in Fed Chairman Powell’s speech on Friday.

Appearance:
US bond yields are likely to resume their upward momentum soon, which could push the US Dollar higher. Although these traditional factors have not been seen as very effective in managing gold prices in the recent past, they may come to the fore again in the near future. Risk appetite is likely to remain healthy. These factors, along with mild ETF outflows, are likely to create headwinds for the metal.

The metal may receive some support from the lackluster stimulus at the standing committee meeting of the Chinese National Congress, which concluded on November 8; where the committee announced a debt swap worth $1.40 trillion to clean up local governments’ balance sheets. The much-anticipated fiscal stimulus is still uncertain. The possibility of geopolitical risks exploding is another supporting factor. From all angles, the yellow metal is expected to trade bearishly in the very short term. But overall the foundations remain intact. Ballooning fiscal deficit, increasing debt/GDP ratio, geopolitical tensions, reduction of the dollar, purchases by central banks, etc. It will cause gold prices to rise further in the medium and long term.

Support is at $2650/$2635/$2600 and resistance is at $2710/$2730/$2750/$2785/$2800.

(The writer is Praveen Singh, Vice President, Core Currencies and Commodities, BNP Paribas Sharekhan)

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