What Next For Gold After The US Election?

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7 mins. to read
What Next For Gold After The US Election?

If you had watched the price of gold during the first week of November, and completely ignored all other news, you could be given forgiven for not knowing there was a major geo-political event going on! Of course, this was the US election, but there was not that much volatility in the famed safe-haven precious metal. Given the lack of drama, and a change at the top of US politics, are we in danger of seeing gold’s summer’s all-time highs threatened – and what is the best way of trading it?

Gold and the US Election

The chart below shows two days of gold trading with each candlestick representing ten minutes of trade. The first day is 3 November, the day the US went to the polls. And the second shows the day after – gold is of course a 24-hour market so there were some big swings in the early hours of the morning UK time.

Gold Price, 3rd & 4th November
Gold Price, 3rd & 4th November

From the end of 3 November into around 3 a.m. of the next day, there was quite a sharp slide of around $30 in the price of gold – which is admittedly a significant move in such a short time period. But by the end of 4 November, the price of gold was trading not a million miles away from where it had closed the previous day.

Going into the election, there was an argument (which I would subscribe to) of there being very little threat for gold selling off significantly, regardless of the outcome. If Joe Biden became the next US President then the market was assuming that there could well be more support for US businesses and citizens, in the light of the damage done to the economy and jobs by the spread of the coronavirus. This support action would in theory put some pressure on the US dollar – and a weaker US dollar normally sees the price of gold going up.

The other side of the coin would be another term for the serving President Donald Trump. This would have been a surprise for markets based on the polls, and the wider narrative running into the election. In times of uncertainty, gold is a popular defensive asset – so again it could well have provided a lift to the price.

Now the election (if perhaps not the official result!) is out of the way what does the next few months have in store for gold – and could we see the summer all-time highs around $2,075 challenged? I think we could – and to view this in context, let’s start with the past decade for gold.

Gold Price April 2011 to Present
Gold Price April 2011 to Present

Before this summer, the last all-time high in gold was set in September 2011 at $1,921 an ounce. A little over four years later gold had lost around 45% of its value in US dollars, and had slid back to $1,050 in November 2015. It then spent almost the next three years trying to build a base – and the current trend started in the summer of 2018, ultimately moving out to fresh all-time highs in the first week of August this year.

Although our gut reaction may be to think: “how much higher can this thing go?”, markets setting fresh all-time highs are showing strength. Of course, no market moves up in one direction forever but for now at least that strength still appears to be there for the price of gold – although admittedly since March 2020 it has moved a long way from that two-year uptrend line. I think there is an argument to be a buyer now if you are shorter-term trader – or to wait for a little while and see if there is a pullback if you are in for the longer-term. Let’s look at the fundamental side for gold and then plan some trading levels.

US Dollar Remains Under Pressure

The initial reaction to the global spread of the coronavirus saw a “flight to safety” by investors in March, and the US dollar index (the dollar against a basket of various currencies) hit its highest levels for more than two years. But since then, the dollar has reversed and slid by around 10%.

US Dollar Index July 2016 to Present

There is something of an unresolved tug-of-war going on with the US dollar at the moment, with it looking like it has been trying to make a base over the last two months – but then unable to hold onto any strength and just return back to its recent lows.

I do think this is the one factor that will dictate the medium-term direction of gold – so what does the next US president mean for the US dollar? If we assume that Mr. Biden is going to provide extra support for the US people, that would seem to pressure the US dollar. But because the Democrats did not have the sweeping victory that many were expecting, it may prove difficult to get some programs passed into law. This has to be something that will be closely watched by global investors in the months of a new presidency – so perhaps this will cap any meaningful movement in the US dollar – and therefore gold – in the short to medium term. We may have to be patient waiting for new all-time highs to be hit.

Two Trading Ideas – And How To Trade Them

I do think there is a short-term trade and a long-term trade here – but first let’s look at how to trade them using spread betting.

Typically, there are two types of spread bet – the daily rolling contract, and a futures contract. The daily rolling is in effect a spread bet with no expiry – it just rolls over to the next day. It is typically the cheapest to trade in terms of spread (the difference between the buy price and the sell price) and is perfectly suited for trades of a few hours/days/week and even a couple of months. A small debit will be made to your account every day to reflect the cost of financing, as you are trading spread bets typically using leverage. These financing costs are small but clearly if you held a position for the longer-term, they need to be considered.

Then there is the futures contract in gold. Depending on your broker there will be various contracts available e.g., December, February, April etc. There is no daily financing charge with the futures contract – as it is factored into the price of the contract when you open the position.

As a comparison, at the time of writing the cash price of gold was $1,952 to buy and the February futures contract is $1,960. Just because you may choose to trade the February contract, it does not mean that you need to close the trade then. Most brokers will let you automatically roll-over the trade into the next contract expiry. I have found this an effective way of trading more medium to longer-term positions in markets such as gold.

Short to Medium Term Trade

What is interesting is what gold has done since that all-time high in August. After the push to $2,075 the price did reverse quite sharply, trading back to $1,865. After a failed recovery, the price slipped lower still in late December, trading to $1,850. But it did “snap-back” from these levels quickly – I think that $1,850 is strong support in gold for now.

Gold August 2020 To Present

I think a short to medium term trade now should use stop losses the other side of those $1,850 lows. Any pullback towards the $1,900 area looks to be a decent buying opportunity and is an interesting zone to watch in the weeks ahead.

Longer Term Trade

I mentioned the potential for a tug-of-war for the US dollar and do not expect this to be resolved any time soon, so I do think this means we may have to be patient for all-time highs in gold. Longer-term, gold is quite far from that two-year trend line so if there are surprises along the way, there could be opportunities to buy into that trend a lot cheaper than today. The ultimate trend line support is at $1,500 – but there are interim levels on the way down to that at $1,650, $1,800 and the afore-mentioned $1,850 from this summer.

Gold July 2018 to Present

Traders were perhaps spoilt with the moves in the summer in gold – and since then there has been just sideways trading over recent months. With the US election out of the way, there will hopefully be some more clarity for the future of the US dollar from 2021 – and it will be fascinating to watch this play out in markets such as gold.

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“Moo’s

Comments (1)

  • Gordon Watson says:

    Can David Jones please tell me if the London Gold Fix still takes place twice a day?

    In 1991 I was working for Credit Suisse in London ( setting an oil trading venture -that’s another story) and I took part in the Gold Fix.

    Regards

    Gordon Watson

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