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Trump's Tweets May Fuel Gold Rally - TD Securities

Kitco News

Tero Vesalainen/

(Kitco News) - U.S. President Donald Trump’s recent tweets accusing the EU and China of manipulating their currencies as well as criticizing the Federal Reserve for raising rates could provide the much-needed catalyst for gold to finally move higher, said TD Securities.

“The USD's strong momentum is set to lose steam, as recent statements from President Trump accusing America's trading partners of currency manipulation and his break with tradition to criticize Fed policy provides a catalyst for fundamental factors,” said TD Securities head of global strategy Bart Melek and commodity strategist Ryan McKay.

On Friday, Trump took to Twitter to speak against the Federal Reserve raising interest rates in light of climbing debt. He also called out China and the European Union for manipulating their currencies and taking away the U.S.’s competitive edge.

In response to the tweets, the U.S. dollar index declined and gold saw a temporary rally. But, by Monday, the effects largely evaporated, with the DXY rising 0.20% on the day to 94.66 and August Comex gold futures falling to $1,224.00, down 0.58% on the day.

“President Trump’s jab at the Fed for raising rates, which created a short covering rally last week, has faded from traders’ memories,” said Kitco’s trading director Peter Hug. “Even his overt threat toward Iran failed to ignite investor interest. Instead, the jump higher in the 10-year bond [yield] benefitted flows back into the dollar and gold backed off Friday’s highs.”

The influence of Trump’s tweets on the market is fading, added UBS Wealth Management global chief economist Paul Donovan.

“After Trump’s tweeting threats against North Korea and the fact that North Korea still seems to be carrying on with its nuclear program unimpeded, it would appear that markets are not inclined to take Trump’s tweets seriously,” Donovan said in a note on Monday.

When it comes to gold, investors are losing patience, said Hug.

“Weakness this morning has prompted renewed selling on the retail side. I suspect there continues to be demand at lower entry points, but strength is being met with skepticism and selling,” he said.

Hug is viewing the $1,220 area as a support line and the $1,237 level as the technical barrier to prices going higher.

But, TD Securities remains optimistic on the gold front, noting that the bank is advising a long gold position on the view that the U.S. dollar will decline later this year. The bank’s commodities portfolio update is to enter the gold market at $1,228 an ounce, with a target level of $1,280.

“The severe flattening of the US yield curve and the lack of positive carry across the Treasury curve when hedging costs are factored in will be major headwinds that start to work against the greenback into 2018,” Melek and McKay wrote.

On top of that, the European Central Bank’s (ECB) is looking to tighten its quantitative easing program this year, which should boost the euro and weigh on the U.S. dollar index.

“With the ECB QE unwinding on the way, we see the euro trend towards the low 1.20s later this year. This should help deflate the DXY currency index, which has been such a negative for gold of late,” TD Securities strategists wrote.

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