With the Donald Trump presidency reaching its 50th day at the weekend (who said it wouldn’t happen?), we take a look at the impact the current administration — which shocked the world in November with a surprise election victory — is having on gold prices.
Although gold has slipped sharply this week as certainty of a March US rate hike increased, the precious metal is still up over 5% year-to-date. It is even more impressive given the strength of the dollar, while equities continue to add broad gains, with both the S&P 500 and Dow Jones Industrial Average clocking record highs.
With markets now almost certain the US Federal Reserve will announce its second core rate rise in four months, gold’s performance is even more surprising. As a non-yielding asset it would be logical to expect the dollar-denominated price to come under significant pressure on the back of rate tightening.
So what has been driving gold prices this year? With an increasingly unpredictable Trump Presidency able to move markets on a tweet or rogue comment, Platts takes a closer look at Trump’s approval — or disapproval — ratings against movements in gold. Using RealClear Politics’ approval ratings, which aggregates more than fifty different polls on the US President’s job performance since the inauguration January 20, there appears to be a pattern.
As the table below shows, the correlation coefficient between the President’s disapproval ratings since January 20 and the gold price is 0.85. A value of 1.0 means there is a perfect positive relationship between the two variables, while a value of -1.0 indicates a perfect negative relationship.
It is much stronger than the inverse relationship with Trump’s approval ratings, which is close to zero at -0.06 and therefore almost non-existent. This illustrates that actions perceived negatively are much closer related to gold moves than actions perceived in a positive way.
Perhaps not surprising given the amount of negative publicity since Trump took his seat at the Oval office, and especially when a lot of the early goodwill after the election result started to fall away as policies were clarified — or, to be more factual, announced.
|Correlation with gold price||YTD||Since Jan 20|
There is also a fairly strong relationship with both the S&P 500 and Dow Jones Industrial Average (at 0.75 and 0.70, respectively, YTD), which is surprising given they should indicate market confidence — and gold tends to do well during times of turmoil basis safe haven demand. Significantly, the relationship between the US Dollar Index and gold is fairly small, below 0.50 (both negative and positive), having been such a dominant outlier for most of 2016. But overall, the relationship is strongest between the disapproval ratings and gold price.
ICBC/Standard Bank lead precious strategist Tom Kendall seemed to sum up the “confused correlations” between gold, equities and the dollar in a recent report:
“Conventional wisdom is that gold is a defensive asset that is inversely correlated to the US dollar and that responds well when other assets are doing poorly… Is that really the case?”
“No, not for a period at least. In reality, it is quite common for US equities, gold and the dollar to all rally together for several weeks at a time,” Kendall said on February 24, adding that: “During periods of greater financial market stress and unconventional monetary policy, the frequency of positive correlations becomes higher.”
Kendall refers to the monetary stimulus from 2009 to 2012 as the most recent example and says, most importantly, that real (minus inflation) US and European interest rates have started to slide further into negative territory – resulting in buoyant retail and institutional gold demand.
This could help explain why a March rate rise, which has increased in likeliness from below 50% just a fortnight ago to above 95% March 8, has finally brought down gold prices this week to levels last seen in January.
That being said, gold is still in the black this year. As well as the uncertainty in the US around its new President, who will have to turn its attention very quickly to negotiations with Congress over the looming debt limit, or ceiling, the next few months are expected to be pretty significant in Europe.
General elections in France and the Netherlands, where right-wing, populist anti-EU/globalization parties are currently leading in the polls, are due in the next few months. Echoes of Brexit, anyone?
The UK is expected to trigger Article 50 to leave the European Union by April, and is still yet to come up with much more than “Brexit means Brexit” in terms of its post-EU plans. Add in the fact Greece (from Brexit to Grexit) is due a hefty Eur7 billion loan repayment in July, and the medium-term outlook is surprisingly supportive for gold, with political developments on both side of the Atlantic expected to play a big role in the months ahead.
Markets hate uncertainty, but gold appears to revel in it.
Related: Find more content about Trump’s administration in our news and analysis feature