Trump's Victory And Gold Prices: What Does It Mean For Precious Metals?

Donald Trump pulled off an upset victory Tuesday for the US Presidency, overcoming Hillary Clinton, who despite recent polls showed that the former Senator had a sizeable lead heading into the election. Yet by the end of the count, it was Trump who captured the required 270+ electoral college votes to win. And as most major world markets were pricing in an outcome in line with the polls, chaos erupted within the financial markets as votes began to show Trump securing a probable victory.

If there is one thing markets hate it is uncertainty. And as Trump will be the first US President without prior government experience to step into office, the outcome is certainly giving markets plenty to worry about.

By midnight of the election day, the US dollar had fallen 2.5% against a basket of world currencies, the Dow Jones Industrial Average was showing a loss of over 600 points for the morning open, and gold had spiked $65 to above $1,335. This was an impulsive fear reaction across the board.

Yet by the end of the trading day, much of the initial fear had abated…with the dollar recouping its losses, the Dow Index finishing in positive territory, and gold giving back all of its gains.

This volatility is certainly extreme, but what is a precious metals investor to make of these wild gyrations? Was this a one-time blip for gold, or is there something more in the works?

The Gold Market In Perspective

Gold's surge and then rapid retracement after Trump's victory comes at a critical technical level for the precious metals. To understand this we must place the move into proper context. To do that we will view gold from the perspective of 2009 through the present.

After bottoming during the crash of 2008 at just under $700 per ounce, gold then rose to over $1,900 by September of 2011. Since that time, and despite the 26% gain during the first half of 2016, the overall trend in gold has been defined by a clear linear downtrend, shown above in the magenta color.

This downtrend began with the $1,900 2011 high, and was hit again in 2012 at $1,800, and then again multiple times just this last summer between $1,345 and $1,375 after the Brexit vote.

This same downtrend line was hit once again today in the early morning hours as gold spiked to above $1,335 following Trump's victory.

A Closer View After The Trump Victory

Let us now zoom this chart into the last 18 months for a closer view of the gold price.

Note the multiple hits last summer on that same long-term downtrend, followed by the price retreat to $1,245 in October.

This same trend line was tested again this morning in the panic following the Trump election, but the market quickly reversed as gold sellers showed up again above $1,300.

As investors, it is important to be aware of these basic long-term trends in the markets. At this time, despite the strength seen during the first half of the year, gold is still being defined by this primary declining trend.

Gold's Support Levels

There are several support levels below the current $1,270 price for gold that are seeing buying interest and acting to hold the price of the metal higher (shown in green on the chart above).

$1,250 has attracted notable interest throughout October, which represents the 61.8% Fibonacci retracement of the advance from last December through July. Fibonacci retracement levels are ratios that appear in many aspects of nature -- from hurricanes to seashells -- and often act as important support and resistance levels in the markets as well (the markets being the sum of human nature).

The $1,200 price level for gold is a further important support level, having attracted significant buying interest when the area was approached multiple times from February through June. All things considered, we would expect those same buyers to show up again at $1,200…should the price retreat that far in the coming months.

Gold's ‘Must Hold’ Zone

As investors, it is important for us to define our risk. In the case of gold, the final potential support level that we view as a "Must Hold" comes in at $1,173, which is the 38.2% Fibonacci level of the entire December through July advance. This is the lowest level that we could allow in our technical model to consider the possibility that gold is still in the beginning phases of a new bull advance.

In the event the gold price falls   below $1,173, there is not much support until the December 2015 lows of $1,045.  And if the $1,173 level were to be breached, we would expect a high probability of gold returning to these lows, or perhaps even lower. Such would turn the entire 2016 advance into a false rally from a technical perspective, with lower prices under $1,000 likely during 2017-2018.

The Bottom Line For Gold

With the surge in price and then immediate selloff after the Trump victory, we can see that the historic monetary metal is caught in the crosshairs of a market battle at this juncture. There is strong buying interest in the mid $1,200's, and strong selling pressure just above $1,300. While emotions can run high during these intense political periods, by keeping an eye on the unemotional language of the charts, we can filter through some of the rhetoric and gauge what the actual market is telling us.

Gold is still attempting to overcome its significant multi-year downtrend from the late 2011 highs. The potential breakout above such a level will not be a small event, as it will see many technical-based buyers rush into the market, which would result in a large price surge that makes the advance seen earlier this year look like just a warmup. We can clearly see gold making several repeated attempts within the last few months to overcome this important level.

However, it is not there yet. And as the Trump victory showed, even a one day fear spike in the markets is not enough to establish a new trend. For now, precious metals investors are encouraged to keep a clear eye on the technical levels presented herein for a break in either direction, as the support and resistance zones on the charts are winding ever tighter toward an eventual resolution.

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