The Big Picture for Gold During a Trump Presidency.

(Originally published on November 10, 2016 at goldtradingmastery.wordpress.com)

The election turned out to be very exciting for gold traders.

By Tuesday night, the dollar-price of gold had fallen all the way down to the 21-day EMA at around $1284/oz. I saw this as a buying opportunity and decided to enter at that point. Unfortunately for me, the price continued to fall until it stopped just over the 200-day EMA. My stop was triggered long before then, at 1274.93. As a result, I lost about 0.171 oz. of gold (about $220).

I then reentered at 1271.23 and Trump started doing very well in Florida. So the price went up and kept going up until it triggered my take-profit point at $1307.74, which was the bottom of the range I talked about in my post from last week. This got me 0.661 oz. in gold profits (about $859).

Even with the loss from earlier in the night, I still made 0.49 oz. net profit (around $637). This is about a 30% increase in my account, taking it from 1.59 oz. to 2.08 oz. So it was really a spectacular night.

The only thing that disappointed me is that I missed when the price finally broke above the bottom of the range. I knew it would be hard for the price to break through. So I set my take-profit point right on the horizontal line at the bottom of the range. But my goal was to reenter the trade once it broke through, and then ride it all the way to the top of the range.

Unfortunately though, I was watching the election coverage and didn’t notice when the price finally broke through. By the time I realized it was happening, the price had gotten much higher and it was too late for me to attempt a trade.

I should have set a forward order. I guess I’ve learned my lesson for next time.

It’s a good thing I didn’t take the trade though. The price ended up bouncing off the downtrend line from 2011 and collapsing back below the bottom of the range again.

I’ll have more to say about this downtrend line later.

So what is the “big picture” in regards to the dollar-price of gold? And how will a Trump Presidency affect it?

Gold: A Long-Term View of Its 16-Year Bull Market

The current bull-market in gold began in 2001, under the first term of President George W. Bush. It was at this time that 10-year real interest rates first fell below 3.5% and kept falling, forcing investors to sell their bonds and buy gold in order to avoid the risk of further inflation.

Since then, here is what the price has done.

xau-long-term

Click the image to enlarge it.

When the bull-market began, it followed a trend line represented by the green diagonal line at the bottom of the chart. Then, in 2005, it broke away and started moving up in the form of a parabola. There was a small dip in 2008, when the financial crash occurred. Then it resumed its parabolic ascent until the recovery of the stock market and QE tapering talk in 2011-2012 finally allowed it to top out.

Gold then traded sideways until it started falling in 2013.

In December 2015, the gold-price finally hit the bottom of the channel. Or, another way to put it is to say that it hit the trend line that had been established in 2005. The current uptrend began at that moment.

Now here is a zoomed-in shot of the past ten years.

xau-long-term-2

The fall that began in 2011 and picked up momentum in 2013 has established a new trend line that is providing resistance to the price. In other words, there is a huge group of sellers who believe the price will always go down any time it hits this line. Because they believe this, they sell every time it gets to this line, and this creates a “self-fulfilling prophecy” that pushes the price back down.

This downtrend line was hit in July of this year. Since that time, it has been tested four times. And each time, the line of sellers has held.

However, let’s look a little closer.

xau-long-term-3

In all of the previous tests of the line, the price has been far above the 10  and 21 month exponential moving averages (represented by the blue and red moving lines on the chart). This means that some buyers “stayed out of the fight” so to speak because they believed gold was overbought. If these EMAs were to hit this downtrend line though, these buyers might fight to keep the price going up, and they might overpower the sellers.

However, let’s assume that the buyers at the 10 and 21 month EMAs are just not powerful enough to overcome the downtrend-line sellers. Then where could we expect the price to go?

The most obvious next stop would be the 100-month EMA, which is currently at around $1192/oz. This EMA is represented by the purple line on the chart. We can expect even more buyers to move in at that point and push the price back up. We’ll then get another fight once the 100-month EMA crosses the downtrend line.

So let’s assume that even the buyers at the 100-month EMA are not strong enough to defeat the downtrend-line sellers. Then what happens?

The next logical place for the price to go would be all the way down to the upward-sloping trend line that currently sits at around $1094/oz. This is the original line that was established in 2005 and that the price bounced off of in December of last year, causing the current uptrend. This line is represented in green near the bottom of the chart.

So where will this 2005 uptrend line cross the 2011 downtrend line?

xau-long-term-4

The worst-case scenario for gold bulls (or, more accurately, dollar bears) is that gold falls to $1176.35 before resuming its upward trend.

The only other possibility is that some strange, confusing, unforeseen event will cause the dollar to break out of its 16-year bear market. This would mean that even the uptrend line from 2005 would not hold. This is of course always possible. But I wouldn’t bet any money on it.

Trump and The Price of Gold.

As Trump pulled ahead on election night, gold went up…and up…and up while stocks plummeted. Speculators everywhere believed that the U.S. economy was doomed and that gold was the only safe-haven that could protect investors from the horror to come.

Of course, this was an overreaction. And the following day, stocks rallied back to where they had been while gold fell back to where it had been.

The consensus in the financial media now is that a Trump Presidency will be good for stocks and bad for gold. Supposedly, this is because his inflationary policies will drive up long-term interest rates and cause bond prices to collapse. This will make long-term bonds attractive to gold-holders, who will sell gold in order to get yield from bonds. It will also cause money to flow from current bond-holders, who are speculating on prices, into stocks.

The problem with this argument is that it doesn’t explain how the government is going to be able to afford higher interest rates. The U.S. doesn’t have enough money to pay for current spending even though it can borrow for 10 years at 0%. If it has to pay 1%, 2%, 5%, or whatever, how is it going to pay the interest on these bonds? Presumably, the only way it could do so is with even more inflation. But that implies a repeat of the Great Inflation of the 70’s – a time in which gold went parabolic and stocks merely broke even after adjusting for inflation.

Of course, in the long-run, it is true that rising interest rates will put an end to gold’s bull market. But this will only happen when the government is forced to raise the Federal Funds Rate above the rate of inflation. And that will only happen when most of the national debt has been inflated away. But by then, the purchasing power of gold will be much higher than it is today, while the purchasing power of stocks will be about the same.

For this reason, a Donald Trump Presidency cannot be anything but good for gold.