*After Trump won the elections, gold and WTI crude have lost price momentum
*Crude is struggling to reach $45 per barrel
*Gold has lost 8 per cent since its November peak
In the aftermath of Donald Trump’s surprise victory in the US presidential elections, Gold and WTI Crude Oil have both lost price momentum, presenting yet another unexpected outcome for investors who expected the opposite to happen.
Crude oil slumped to just below $43 and is struggling to reach $45 per barrel, but the bulls face headwinds from a massive build-up in US stockpiles and record production levels from OPEC.
EIA statistics from the first week of November show oil production increasing to 8.69 million barrels per day, up 170,000 bpd from the previous week.
What the bears say about WTI Crude
The bears have a good case for the worldwide oil prices to stay down and out. They growl about low demand and over-supply, saying that the OPEC deal to reduce output doesn’t seem feasible given all the disagreements between the member states.
The bears are wary of Iran’s production levels, which have soared ever since sanctions were dropped. They are increasingly alarmed at OPEC’s record-high output for October, which increased by another 240,000 barrels per day to 33.64 million bpd.
In short, the bears are on the hunt for lower prices, perhaps even as low as below $40 per barrel ahead of OPEC’s headline meeting on November 30.
The incoming US president has promised to strengthen US business, which could mean deregulation for the US shale industry, adding even more impetus to already-frenetic production levels, say the bears.
What the bulls say about WTI Crude
The bulls fight back on the grounds President-Elect Donald Trump may carry out his election campaign promise to reverse the nuclear proliferation treaty with Iran, paving the way for new sanctions which would see the country’s production cut by the approximate amount planned by OPEC.
The Iran nuclear deal could be tossed out because it never went through Congress and is based on an executive order, and the bulls maintain that Trump is likely to make its dissolution a priority. The bulls believe that a production cut from Iran would boost the price.
The tentative OPEC agreement to cut production will be pushed through because oil-producing countries cannot afford an extension of the low-price era and will stick together to boost demand, say the bulls. They toss their horns at the bears who claim that Nigeria, Iraq and Libya have all boosted production, saying that this is a negotiation tactic aimed at strengthening their position when the cartel gets down to nitty gritty in Vienna on the 30th.
Moving to gold, the commodity has lost eight percent from the November peak seen just after the US elections and at the time of writing is falling rapidly to $1220 per ounce. The main expectation had been that Gold would rise and stay higher in the event of Donald Trump winning the elections, but instead the risk-on sentiment quickly returned after the political uncertainty ended and support for the precious metal withdrew.
What the bears say about gold
The bears dismiss the prospect of gold reversing the current downward trend, saying that the US economy is heading towards tighter monetary policy and more attractive Treasuries compared to the non-yielding precious metal. The Federal Reserve is more likely to raise US interest rates by the end of 2016, meaning that all bets will be on USD-denominated assets being ripe for a buying spree, they say.
According to the bearish view, Donald Trump’s conciliatory victory speech calmed investor fears and his economic policies will boost US business and drive stronger growth, meaning lower demand for safe-haven assets like Gold.
The Gold bulls disagree
Those who are bullish on gold believe that there is still considerable uncertainty around the Federal Reserve’s stance, and that it will remain dovish until the US economy is clearly revived, with jobs and GDP growing strongly. Until then, safe-haven assets like gold will remain in high demand, say the bulls.
As for Trump’s economic plans to strengthen infrastructure and cut taxes, these would lead to a higher budget deficit and higher inflation, making gold an irresistible hedge. Political risks are everywhere; Trump’s foreign policy is still opaque and the EU is heading for another challenge to its union with a referendum in Italy on December 4 and elections in Germany, France and Austria in 2017. The far-right candidates in those elections could gain traction and add to more political uncertainty – and make gold the asset of choice again, according to the bullish view.
There are strong points on either side, and investors would do well to take them into consideration when deciding their strategies over the last two months of 2016 and the first quarter of 2017. Given the underlying political and economic uncertainties, I’m with the bulls on gold.
The markets have been nervous all year and the mood is still liable to turn negative at the next shock. The bears are likely to prevail in the Crude Oil markets, at least in the short term. That’s provided OPEC cannot close the production cut deal on November 30. In that case, the bulls could win the day and the price may move back north of $50 per barrel.