Market Report: Trumped!

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This week saw the surprise nomination of Donald Trump as President-elect in the early hours of Wednesday morning.

So far as markets were concerned, Wednesday’s trading was a repeat of Brexit: spike in bond yields; collapse of equities followed by recovery; spike in gold and silver, followed by retracement. Gold on the day ranged over $60 between $1273.3 and $1337.5 before closing at $1276.

By early European trade this morning (Friday) gold ended sharply lower on the week at $1255, down from $1304 at last Friday’s close. It appears this weakness is driven by futures markets, since physical spot gold and silver are in backwardation out to December’s delivery. The tightness in physicals is reflected in silver, which rose from $18.42 to $18.61 on the week by last night’s close (Thursday). Gold futures contracts exchanged-for-physical on Comex jumped on Wednesday and Thursday to 45,000 contracts (4.5 million ounces) which is exceptional, and consistent with physical shortages in the market.

It would be foolish to attempt to forecast price directions until markets calm down. A Trump win is a game-changer for Wall Street, because a Clinton victory, funded by the big banks, was reckoned on with all the certainty shared with the British Remainers last June. Trump has not been funded by the banks, so owes them nothing in terms of influence. The banking community faces a complete reassessment of its political contacts, and that creates uncertainty.

What is true for the commercial banks is also true for the Fed. Interest rate policy will have to be reassessed, and here the similarities with Brexit presumably ends, because the Fed did not go around telling people voting for Trump would be a disaster. The Fed will want to get a clearer idea of Trump’s economic policies before raising rates, which would indicate that a postponement of the December rise is possible. Alternatively, one could take the view that the end of the plebiscite will free the Fed to raise interest rates, in which case December is on for a 25 basis points increase. Only time will tell.

The other gold story this week is a surprise from India. Narendra Modi, Prime Minister, suddenly announced that Rs500 and Rs1,000 notes were no longer legal tender, in an attack aimed at black market dealing and currency hoarding. These notes are only worth US$7.50 and US$15 respectively, and represent over 85% of the currency by value. Anyone with cash savings and no bank account now finds the bulk of them are wholly worthless, unless they submit them to a bank, in which case they can obtain up to 4,000 rupees in cash ($60), with the balance credited to a bank account which many people don’t have. New 500 and 2000 rupee notes will be issued in due course, but no date is given. Contacts in India reported a scramble for gold, which has driven up premiums against international prices, but how it is paid for is a mystery.

Modi’s move is economically disruptive, visiting severe hardship on the poor and the unbanked. Initial public opinion appears supportive of anti-corruption moves, but patience is bound to wear thin in the coming days. One can only think that surprise moves like this will undermine trust in the currency, and once the new notes are in circulation, gold smuggling will end up greater than ever before.

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