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Asset Watch
Thursday, January 22, 2025
With Donald Trump entering the White House for a second term, he inherits a resilient U.S. economy and a stock market near record highs. However, with the U.S. dollar and Treasury yields soaring in recent months, financial conditions have tightened considerably, which is bearish for gold.
As a result, does the yellow metal sink or swim during Trump 2.0?
Higher interest rates hurt gold because it’s a non-yielding asset. And when bonds offer investors higher potential returns (especially inflation-adjusted or ‘real’ returns), some market participants will favour fixed income.
Similarly, a stronger U.S. dollar makes it more expensive for foreigners to purchase gold because futures contracts are priced in USD. Consequently, both fundamental headwinds often depress gold’s value and that’s why the U.S. Fed has so much impact on investor sentiment and positioning.
While high interest rates and a strong U.S. dollar may seem problematic, it could be a blessing. Since the metrics are close to their recent historical highs, corrections for both could fuel gold’s next meaningful rally. Furthermore, gold rose by 64% during Trump’s first term, so there is little evidence that his policies hurt gold in the long run.
Plus, if the Fed turns dovish again and some of Trump’s USD enthusiasm wears off, gold should be a major beneficiary.
Noticeable throughout the 2019 to 2020 bull run was the importance of the five and 10-month moving averages. If you analyse the blue and yellow lines near the middle of the chart, you can see that both acted as support en route to higher highs.
Likewise, the price action on the right side of the chart shows how gold has closed the last 15 months above its 10-month MA and is on pace to make it 16 in January. In addition, the 5-month MA has been nearly as strong, with it holding for 14 of the last 15 months.
Add it all up, and the technicals signal a robust uptrend that should continue for the foreseeable future.
A historically winning approach has been to stay long gold above the 10-month MA. It currently stands near $2,525, and until a breakdown occurs, the bulls deserve the benefit of the doubt.
It could be wise to ride the volatility and place a stop-loss order slightly below the 10-month MA to limit losses if the trade doesn’t unfold as planned.
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