Gold shares hammered by post-Trump blues

This was not in the playbook.

The unlikely possibility of a Trump victory had gold bugs weak at the knees ahead of the US election. Instead, we are seeing JSE-listed gold companies brought to their knees, as Monday’s price action reveals.

What happened?

The Republican Party’s candidate made a number of inflammatory statements ahead of the elections which had the world nervous about what a Trump Presidency could mean for NATO, Mexico, international trade relations (China!) and the responsible use of America’s nuclear codes, amongst others.

This all seemed to feed into the narrative that – while unlikely – the possibility of a Trump presidency would create a more fragile world order – something investors in their droves would seek comfort from in gold.

In the immediate aftermath of the result this thesis seemed to hold true. Gold reversed a week-long decline heading into the election, and at one point, as Trump’s nomination became secure, traded as high as $1 330/ounce intraday.

This was supposed to be the cue for the rocket to launch to $1 400, $1 500 and beyond. “If Donald Trump is elected next week, we think gold can go anywhere shy of $1 400. If Hillary Clinton is elected, we think gold can probably fall by $20, $30. So the clear skew in this trade is to the upside,” said UBS Director, Wayne Gordon, in an interview with Bloomberg a week before the election.

Many executives at gold companies were equally optimistic. So what happened?

It appears many commentators overlooked the effect of the strength of the US dollar on gold prices. Dollar strength has been ably supported by Trump’s ‘America First’ strategy, and the prolonged intent from Federal Reserve chair Janet Yellen to continue raising interest rates in the US.

The effect of Trump’s likely policies is hard to decipher. But his rhetoric on trade, which has included promises to slap companies with steep import tariffs should they relocate manufacturing plants abroad, and labelling China a “currency manipulator,” suggests he will aggressively revisit trade pacts that the US has entered into.

But perhaps the strongest cue for the US dollar has come from his promise to reform the tax code, which would potentially slash the corporate tax rate from 35% to 15%. Even more significantly, Trump has promised to do a deal that would resolve the impasse US corporates face when considering whether to repatriate foreign earnings. The current tax regime dictates the money becomes subject to a secondary second tax when doing so.

Trump has clearly stated that he wants that money to come back and be used to invest in and grow the US economy. It is estimated that there is as much as $2.5 trillion held by American companies abroad, equivalent to approximately 15% of GDP.

Rand price of gold (per ounce) over the last year 

Source: IRESS

Dollar strength makes commodities such as gold more expensive for the rest of the world. Since the election almost a month ago, the US dollar is almost 5% stronger against the rand. Over the same period, the gold price has fallen from $1 280 an ounce, to Monday’s $1 167 an ounce – a decline of 8.8%.

The combination of the strong dollar and weak gold price has led to lower future income for South African gold producers – the gold price in rands has fallen precipitously. This looks set to continue until Trump lives up to his pre-election billing.