Buy the rumor sell the fact

(Kitco News) - After an exhausting and contentious campaign season, U.S. voters will finally get their say next week. Although many pundits believe it’s unlikely that a definitive winner will be announced on Wednesday, much of the uncertainty surrounding the U.S. political landscape is expected to ease next week, which might not bode well for gold.

The precious metal saw significant momentum last month due to the volatility surrounding the election. Market analysts noted that improving odds of former President Donald Trump winning, and a potential “Red wave” in Congress, increased fears that government spending would continue to rise unabated. In recent weeks, that fear has extended to either party gaining control over the White House and both chambers of Congress.

However, there is a famous saying in financial markets for times like these: “Buy the rumor and sell the fact.”

This week, gold prices pushed to all-time highs above $2,800 an ounce as investors have been buying into rumors around the U.S. election. Next week, we could see some selling on the news.

While the gold market is long overdue for a correction, any remaining bears shouldn’t get too excited, as FOMO (fear of missing out) continues to grow in the marketplace. We see that dips are being bought aggressively.

In this step-by-step rally since July, gold has managed to hold support at every major breakout level. It held support at $2,400 in August, at $2,500 in September, and at $2,600 in October.

Famed commodity investor Dennis Gartman said he has become more cautious about gold as it attracts more investor attention. He noted he sees some froth building in the marketplace; however, he added that despite any short-term weakness, gold’s long-term fundamentals remain well supported.

“The major trend is still from the lower left to the upper right,” he said.

Aside from the geopolitical turmoil created in this election cycle, gold continues to be well supported as the U.S. economy and labor market slow.

In October, the U.S. economy added only 12,000 jobs, well below expectations of 100,000 jobs. Some of the weakness can be attributed to volatility created by hurricane devastation in Southern states. However, looking beyond this volatility, sharp downward revisions in August and September show that the labor market is cooling.

At the same time, we also saw this week that inflation remains persistently elevated. The core Personal Consumption Expenditures index, the U.S. central bank’s preferred inflation gauge, shows consumer prices have remained at 2.7% for the last three months.

The Fed is stuck and will continue to lower interest rates as the labor market weakens. Although they may not be as aggressive as they’d like, higher inflation means real interest rates will drop, hurting the U.S. dollar and supporting gold prices.

In this environment, investors should be cautious about chasing the gold market. Still, make no mistake—there is plenty of value left in the marketplace.

Have a great weekend