Way before the elections day commodity prices were already volatile as expected due to the uncertainty of the US presidential elections on November 8th 2016. However, after the shocking victory by president-elect Donald Trump, investors now know their fate is determined and markets are trying to figure out what impact Trump’s presidency might have on the economy in the long run. Once the full risk exposure and the potential benefits of Trump’s presidency are determined, markets will then start factoring them in the commodity and other financial assets’ pricing both in the US and globally.
Economic analysts have not been able to fully predict the economic policy changes that Trump will implement when he assumes office in January 20th 2017. But based on his campaign promises, a lot of the internal trade policies and international trade agreements the US has will be affected in one way or the other. This is then expected to create an inflationary pressure within the economy; which will keep real interest rates low and boost commodity trading since bond holders will opt to allocate some of their portfolios to commodities in a period of low interest rates. The expected trends in gold and copper prices will however follow different paths and will be supported by different aspects of Trump’s proposed economic policies.
Gold has been known to be the safe haven for investors over the years when there is significant market uncertainty. Starting June 2016 the election fever in the US picked up and polls began showing that the race between Trump and Hillary was getting tight, gold trading started rising. The trend was not however a smooth one with a lot of fluctuations experienced all through until October when Trump’s publicity went down low and the race was starting to be more predictable. As we neared the homestretch in November, Trump managed to recover in publicity and popularity; making the race tighter and resulting to another spike in gold prices. The upward trend then continued until the Election Day after which the gold price dipped and has been on a downward trend since to date.
With Trump having recorded a clear win, markets are now not in a hurry to make guesses on the next move until he is sworn in and assumes office in January 2017. In the mean-time, most investors are on a hold mode with a wait-and-see strategy before making their next investment moves; hence explaining why the gold prices are not rising as expected. However, if Trump implements policies such as reversing NAFTA and imposing hefty tariffs on China as he promised during his campaigns, then the inflationary pressure will kick in in the US. This will then be followed by lower real interest rates which encourage more borrowing from by investors in order to invest in higher assets such as gold and other commodities that will be offering higher returns. Gold price is therefore expected to remain low until next year when it will pick up an upward trajectory as new policies start being implemented; and rise to an expected high of $1,300 an ounce.
President-elect Donald Trump in his victory speech promised that he would prioritize infrastructure development once he assumes office officially. This was welcome news for the construction industry with the promised construction of schools, hospitals and roads. Construction and engineering companies saw their shares soar up immediately after the victory speech and some stocks such as Granite Construction Inc. and AECOM have gained more than 20% since November 8th. Apart from the benefits of potentially getting the massive deals to implement the stimulus package on infrastructure development, these companies stand to gain from the expected cuts in domestic corporate taxes. With most of them being located in the US, a strong dollar will not have an impact on their bottom lines.
This optimist and the expected high government expenditure on infrastructure have seen copper prices rise steadily since the Election Day to date. Much as the trend is expected to reach a resistance level and plateau at some point, the current upward trend is expected to be sustained until the end of the first quarter in 2017. Copper futures are aligned with the market expectations so far; having shot up by about 24% from November 8th to date as shown below.
A Trump presidency seems to be good news to commodity traders at least in the short-run. However, as Trump starts implementing some of his proposed policy changes and amend others before implementing them, the market sentiments might shift towards the stock and bond markets. But in the mean-time commodities are more favored by investors and their prices are expected to keep rising all through the first quarter of 2017.