Gold: Right but so Wrong!
 
In the week leading into the election (before the FBI released there “nothing to see here” comments regarding Secretary Clinton’s email issue), we commented that at least half of any potential “Trump premium” was already priced into gold, which had crept back above USD $1300oz at the time.
 
By 10am on Wednesday the 9th November, that premium was well and truly gone, with gold trading back closer to USD $1250-USD$1260oz, with a Clinton win looking the most likely outcome.
 
Around that time, we commented in a conversation with Bloomberg that were Trump to come home with a surprise victory, we saw gold pushing up at least toward the USD $1325oz level. This did in fact take place, with the gold price spiking in during a few crazy trading hours, which also saw the Dow futures markets drop well over 700 points at one point.
 
But if the election result was a surprise to most, then the market reaction since has been well and truly bizarre, with the Dow staging one of its biggest ever turnarounds, swinging roughly 1000 points to close at record highs later in the week, whilst the US Dollar, which was originally off some 2%, also rallied.
 
Was this expected? Absolutely not…though considering gold typically reacts to other market moves, it is the performance of the stock market and the US dollar that were no doubt the major contributors to the gold price weakness. Surging bond yields, and heightened expectations for a December Fed hike have also hurt gold, with CME Group now suggesting there is an 81% probability of a Fed interest rate hike in December, up from 71% just a day earlier.
 
Either way, this confluence of unexpected factors have all led to the gold price weakness we’ve seen since Wednesday night Australian time, which
culminated in a sharp USD $30oz sell off on Friday (see chart below which shows the last few trading days) with the yellow metal closing out the week closer to USD $1230oz.
 

 
No doubt a lot of longs would have abandonded positions in the last three trading days of last week, whilst their was some major ETF outflows too.

It will be interesting to see how markets react across the rest of the week, now that everyone has had a chance to catch their breath and reassess conditions, though we’d note there is strong support for gold around the USD $1200-$1220oz level, whilst any decline in the AUD will also help support prices for local investors. On the currency front, we are already beginning to see some movement, with the AUD declining from near USD $0.78 to just below USD $0.755 in the last week, with more potential downside to come.

According to our latest technical report, the gold price now (midday of Monday the 14th, Sydney) is hitting the top of the Weekly Cloud and the 50 % retracement of the 2016 rally. This level should prove supportive, and a hold here should see gold cycle back to US$1276, perhaps just ahead of year-end. 
 
That is not to say that there couldn’t be more weakness ahead for gold, especially if the USD continues to rally. Whilst the dollar index is again pushing the 100 mark, further upside can’t be ruled out, especially with the uncertainty regarding the upcoming December 4 Italian referendum, which some (admittedly attention seeking) analysts fear could effectively spell the end of the Euro. Either way, with this referendum just around the corner in Italy, plus elections to come in Austria, France, the Netherlands and Germany in the next year, and the ongoing drama of Brexit, 2017 is shaping up as a year of major uncertainty regarding Europe.
 
Put it this way, if the United States of America can go through the political fragmentation and change we’ve just seen, then what does that portend for the not so united countries of Europe.
 
In as much as the heightened political uncertainty on the continent is bearish for the Euro, it is also by default dollar bullish, which will likely limit the appeal of gold to some degree, though the impact of any decline for AUD investors will likely be cushioned by currency moves. in USD terms, if the gold price does drop below USD $1200oz, then decent support levels would likely come in around USD $1170oz an USD $1157oz. 
 
Some gold bulls will also be troubled by the revelation that high profile investors like Stanley Druckenmiller have sold out of their gold positions, citing his optimism on the economy and on stock markets, though we still think the metal has no shortage of supportive factors.
 
First amongst those is that whilst the political developments in Europe might be USD bullish short-term, the bigger picture story is that they portend lower growth in the economy, more volatility in financial markets, and potential currency devaluation down the line – all factors that are supportive of gold.
 
We also see further evidence of the appeal of gold due to the latest developments in India, where the Prime Minister has outlawed large denomination bank notes. People in the region rarely require an extra incentive to buy gold at all, but this will serve as further impetus.
 
With more interventionist monetary policy almost certainly on the way in the developed and developing world, the appeal of gold will not only endure, but it will be enhanced, translating into higher prices over time.
 
In short, whilst the world changed last week, gold’s most important attributes, including the fact that it is liquid, tangible and easy to trade did not, and those attributes will become more and more attractive to investors facing an ever more uncertain world.
 
Therefore, for those who want to stay long history, and short hubris, we’d continue to use this corrective period as a buying opportunity in precious metals.

The United States Election!

Anyone who writes and speaks about financial markets on a regular basis is used to using disclaimers, both about past returns not being a guarantee of future returns, and why information is educational in nature, and not specific financial advice.
 
Given the divisiveness and anger that the recently concluded election has generated on both sides of the political divide, one feels the need to provide a political disclaimer in this market update, before offering some thoughts on why the election result went the way it did.
 
Here it is
 
Political Disclaimer:
 
If I were an American citizen, I would not have voted in the recently completed election, a position consistent with at least 40% of eligible voters, who also chose to stay home on election day last week. Had I been given the opportunity to do so in 2008, I would have unquestionably voted for Obama. What I’m going to say below should not be interpreted as an endorsement of President elect Trump (see comment above about not voting) and his political platform, and nor should the criticisms I make of democratic nominee Hillary Clinton take away from the fact that she has undoubtedly tried to do many good things during her time in politics.
 
With that out of the way - deep breath - here we go!
 
One of my life dreams was to travel across the United States. In the last 3 months of 2009, I was fortunate to live that dream, spending that entire time period driving from New York to Los Angeles, starting with the long drive south down I-95 to Florida, with stops in South Carolina and Georgia along the way.
 
After that I went to Memphis, Nashville and New Orleans for Halloween, before spending the better part of a month in Arizona, Utah and Nevada – where I was able to enjoy the natural beauty of American national parks including Bryce, Zion, Canyonlands, Arches and the Grand Canyon, as well as the not so natural beauty of Las Vegas.
 
At the time, I’d say the mood of the country was cautiously optimistic, as whilst it was still licking its wounds from the worst of the GFC, a young, charismatic president had entered the White House on a message of hope and change.
 
And whilst their was anger and frustration at what had happened on Wall Street, and the expensive and futile interventions in the Middle East that had begun in the aftermath of 9/11, American’s seemed more than willing to give this agent of change and hope the opportunity he deserved.
 
This was seen in a record turnout at the polls when Obama first ran for office, with the 2008 election seeing the highest eligible voter turnout in some 40 years!
You end up speaking to a lot of people when you spend 3 months travelling alone, and I don’t remember speaking to one person who was anti-Obama, even in the “red states” I visited.
 
Several years later, and it’s clear that the USA, and indeed the world, is a different place. What has interested me most though in the aftermath of the “shock” US presidential election of last week is the far greater emphasis that has been spent trying to analyse how and why Donald Trump won, rather than why Hillary Clinton specifically, and status quo politics (for want of a better term) more generally lost.
 
Indeed a quick Google search typing in “Why Donald Trump won” yields over 172 million results, whilst “Why Hillary Clinton Lost” yields only 76 million results.
 
Relevant as trying to understand the reasons for Trump’s victory are, the focus is misplaced. For rather than actively embracing the policies of a candidate with zero political experience and no shortage of character flaws, a study of the voting data suggests conclusively that the key takeaway from this election must be that Hillary Clinton lost.
 
If 2016 is to be remembered for anything, it is the year that American’s (and the Brits for that matter) abandoned status quo politics.
 
To help illustrate why, consider the chart below, which plots the sales (blue column) and costs (red column) for a fictional business, in 2008, 2012 and again in 2016.
 

 
As you can see, back in 2008, the company was making a profit of some $9.5 million, with revenue pushing $70 million, whilst costs were just $60 million for the year. Fast-forward to 2016 though, and there is almost no profit left at all, but not because there has been an explosion in costs (in fact they’ve barely budged) but because sales have dropped by over $8 million, and are now barely above $60 million.
 
Anyone looking at these statistics could not help but come to the conclusion that declining sales is the key issue that has led to the deterioration of this fictional business, rather than any kind of blow out when it comes to the cost side of the business.
 
And whilst the above chart represents a fictional company, those dollar values for sales and costs actually align with the number of voters who turned out to vote Democrat (sales) vs. Republican (costs) in the last three presidential elections.
 
In short, Trump gained less than 500,000 votes compared to what John McCain did back in 2008, a decline on a population adjusted basis considering the US has circa 18 million more people living in it today compared to 8 years ago.
 
 The bigger story is clearly the fact that Hillary lost the better part of 8 million votes relative to what Obama was able to generate (though the numbers will change once all popular votes are counted).
 
A look through the swing states that delivered the Electoral College to Trump reinforce the reality that Hillary lost this election far more than Trump won.
 
In Wisconsin, Ohio, Pennsylvania, Michigan and Iowa, Hillary lost over 2 million votes, a decline of over 18% compared to the numbers Obama was able to generate back in 2008.
 
Trump won all of these states this time around, but he didn’t even gain 1 million votes relative to John McCain, a number that is again even less “impressive” when you factor in population growth over this time. The results of these swing states on a combined basis is shown in the chart below.
 

 
Source: Wikipedia, Wisconsin, Ohio, Pennsylvania, Michigan, Iowa combined
 
Even in Florida, which Trump also won, the result hardly represented a widespread endorsement of the Republican candidate. For whilst he picked up over 500,000 more votes than John McCain did in 2008, as a percentage of the population, his total vote didn’t budge relative to the results from 8 years ago.
 
In this sense, even Michael Moore, one of the few commentators who understood the reasons behind the rise of Trump and the disenfranchisement of average American voters (read here for his excellent article on why Trump would win), was only half right about this election.
 
For Trump is not on his way to the White House because tens of millions of voters decided they wanted to “wreck the joint” or install an agent of chaos, giving a big “Firetruck You” to the “elites” ruling the system, as Moore suggested. Indeed across the entire 14 Swing States, it looks like the total number of people who voted increased by only 2.8% relative to 2012, so it was hardly a case of millions of people coming out of the woodwork to wreck the status quo. You can get all the state by state stats here via this Google spreadsheet.
 
Maybe I’m reading it wrong, but it appears to me at least that the main reason Trump is on his way to the White House is because people could not bear to vote for a continuation of status quo politics, and they couldn’t bear to vote for Hillary Clinton, so they stayed home.
 
And those that wouldn’t come out in force to vote for Hillary broke across many a demographic breakdown. Analysis contained in the Telegraph showed that she suffered a 6% drop in the Hispanic vote relative to Obama in 2012, as well as a 6% drop in the vote of 18-24 year olds, and an 8% decline amongst voters earning less than $50k per annum.
 
Meanwhile, an article in the Guardian suggests more white women voted for Trump over Hillary, and only half (51% to be exact) of college educated white females voted for Hillary.
 
Not surprisingly, Hillary lost big-time in small city and rural areas, suffering a 14% drop relative to the Obama vote from 2012, with a large part of this demographic (which was essentially tied four years ago), turning to Trump, as the below image highlights.
 

Source: Telegraph, click here for article
 
The simple minded analysts trying to explain away the Trump victory purely referencing the racism/sexism card are all conveniently neglecting the fact that Obama (a black man with a middle name of Hussein) won white working class votes in many a swing state in a canter when he was on the ballot in 2008 and 2012, as this article in the New York Times illustrates.
 
Most rational observers would also think it’s a little simplistic to blame either racism or sexism for the result when over half the people who share your same genetic and racial background (i.e. white females) didn’t vote for you!
 
Clearly the answer is more nuanced than that, with the continued economic pain of the post GFC environment, and the myriad of issues with Clinton herself as a candidate the driving factors behind Trumps victory.
 
After all, as Michael Moore (who did everything he could to get Hillary over the line) predicted, one of the reasons Trump would win the rust belt was because; “he’s said (correctly) that the Clintons’ support of NAFTA helped to destroy the industrial states of the Upper Midwest”.
 
Moore also noted the hurt these people were feeling economically, stating that (in typically colourful style_); “From Green Bay to Pittsburgh, this, my friends, is the middle of England – broken, depressed, struggling, the smokestacks strewn across the countryside with the carcass of what we use to call the Middle Class. Angry, embittered working (and nonworking) people who were lied to by the trickle-down of Reagan and abandoned by Democrats who still try to talk a good line but are really just looking forward to rub one out with a lobbyist from Goldman Sachs who’ll write them nice big check before leaving the room.”_
 
 Hitting the nail on the head again, Moore went on to observe that; “Let’s face it: Our biggest problem here isn’t Trump – it’s Hillary. She is hugely unpopular — nearly 70% of all voters think she is untrustworthy and dishonest. She represents the old way of politics, not really believing in anything other than what can get you elected. That’s why she fights against gays getting married one moment, and the next she’s officiating a gay marriage,”
 
Finally, there was the issue of Hillary’s war record. As Moore observed, not only did she support the Iraq war, but that she is “a hawk, to the right of Obama”, before sadly observing that he believed that “Clinton would find a way to get us (America) in some kind of military action.”
 
Whether he is right or not I guess we will never know, though the anti-Russia rhetoric from Clinton during the election campaign means it is hard to discount.
 
I actually think this last factor was an under-reported but very real issue for swing voters in swing-states, especially in light of both the email scandal, and the pay for play access question marks regarding the Clinton Foundation, and some of their key donors from the Middle East.
 
For not only are the swing state voters in the Midwest the people that have suffered the most from an economic perspective in the “post GFC” era, but they are also the ones that pay a disproportionately high price when it comes to the blood that is sacrificed in America’s reckless military adventurism.
 
For evidence of this, consider the chart below, which shows a breakdown of which states those that enlist in the US come from.

 
As you can see, most of the Midwest swing states are ‘above-average’ as it were when it comes to young people entering the military, as is Florida. These are the people whose sons (and daughters) actually die in the wars America wages, or come home with injuries, both physical and mental, from which they’ll never recover.
 
From this perspective, Hillary was arguably the worst possible candidate you could ask people from these states to vote for, especially when she labelled them, and any potential Trump supporter, a “basket of deplorables”, all the while lavishing in the praise of well-known political and policy analysts, plus champions of the working class, including Beyonce, Jay-Z and Justin Timberlake!  
 
After all, even those passionately advocating for her candidacy admitted her record of voting had helped bring economic degradation to these regions and those who inhabit them, whilst her cavalier approach to foreign policy would likely continue to bring further bloodshed and suffering.
 
Trump on the other hand, whilst supporting a strong military, and looking after veterans, at least questioned the idea of spending limitless amounts of American blood and money fighting war after war.
 
Indeed this was a point Silicon Valley entrepreneur and Trump supporter Peter Thiel specifically mentioned in his speech at the National Press Club, where he noted that; “We have been at war for 15 years, and we have spent more than $4.6 trillion dollars. More than two million people have lost their lives, and more than 5,000 American soldiers have been killed. But we haven’t won. The Bush administration promised that $50 billion dollars could bring democracy to Iraq; instead, we’ve squandered 40 times as much to bring about chaos. Yet even after these bipartisan failures, the Democratic Party is more hawkish today than at any time since it began the war in Vietnam. Harking back to the no-fly-zone that Bill Clinton enforced over Iraq before Bush’s failed war, now Hillary Clinton has called for a no-fly zone over Syria. Incredibly, that would be a mistake even more reckless than invading Iraq”
 
You can read more of that speech (it’s worth a look) here.
 
People are absolutely within their rights to point out Trumps many flaws, and I for one am more than a little nervous and concerned about what will transpire during Trump’s tenure in the Oval Office.
 
But is it really so surprising several million American’s, particularly those who suffered the most in the past few years, wouldn’t vote for Clinton? I certainly don’t think so.
 
For as a whole, despite the good things she has done or tried to do in the past three decades, she was ultimately seen as the very embodiment of status quo politics, a system that has seen America degenerate into a land of less opportunity, and increased inequality, characterised by too much welfare, too much warfare, and too much Wall Street.
 
Status quo politics is an increasingly poor product, and she was the worst possible salesperson. It’s truly no surprise that the American people (and indeed people all across the developed world), just aren’t buying it anymore!

Until next time,
Jordan Eliseo

Disclaimer
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