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Gold and Trump

08 Jul 2018 - Archive

On November 8th, 2016, the United States elected Donald J. Trump as president-elect. These results were an upset that was incorrectly predicted by most mainstream media sources.

The election of Trump has economic implication for the global economy and forex markets. His victory was felt immediately, with a brief rally in gold, followed by a rally in the dollar that defrayed it, a crash in the Mexican Peso, and some movement in the major U.S indices.

The Election Dynamics.

Several contentious states decided the election: Florida, Pennsylvania, and Michigan. Trump won these states by 1 percent margins, and in the end his campaign managed a solid 279 to 228 electoral victory while Hillary won the popular vote with 59.9 to 57.7 million votes.

As the likelihood of a Trump victory increased, there was significant downward pressure on U.S index futures, the U.S Dollar, and the Mexican Peso. Gold, benefiting from both dollar weakness and economic uncertainty, initially rallied in response to Donald Trump.

However, the gold rally soon reversed as the Dollar sprung back up. The metal is trading at $1,269.80 as of November 10th 2016. The Powershares Dollar Bull ETF (UUP) represents the dollar while GLD represents gold. 

The U.K Pound crashed after the Brexit vote; however, after a similar upset in the U.S, the Dollar and stock markets rallied after a brief downward correction. This result caught many analysts by surprise.

Perhaps a Trump presidency is a good thing for the global economy. This is the conclusion many investors made when looking closely at Trump's policies - including a promise to increase government spending, cut taxes, and lessen regulation.

Shares of Bank of America (BAC) closed almost 6 percent higher on the trading day after Trump's victory. United Rentals (URI) and other equipment and construction firms rallied over 10 percent - ostensibly in response to the candidate’s promise to build a wall on the U.S/Mexican border.

The Central Banks

According to Jurrien Timmer of Fidelity Investments, Trump's victory represents a “political uprising” against unresponsive government and central bank monetary policy that has led to uneven economic recovery. 

The public seems to have lost faith in the efficacy of central bank activism as a way to bring economic benefits to regular people. These policies have, in part, led to strong housing and stock markets while blue collar workers feel their situations remain stagnant or worsen.

Trump champions fiscal policy. He talks about strengthening the economy by investing in infrastructure and putting people to work building bridges, airports and roads instead of relying on the central bank's esoteric monetary policy. His presidency may mark an inflection point between fiscal policy and monetary policy as the primary method for facilitating economic growth in the U.S.

Conclusion

The market seems to believe a Trump presidency will lead to fiscal policy playing a more active role in economic stimulus and overall economic improvement. It is unclear what effect this election result will have of the U.S Federal Reserve’s interest rate hike predicted to occur before the end of the year. 

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