Gold prices have started the week on the back foot, as traders are very much picking up from where they left off last week. In addition to this, gold traders are also closely watching the US political landscape after President Joe Biden dropped out of the presidential race on Sunday. He has endorsed Vice President Kamal Harris as the Democratic nominee. Gold traders have been broadly expecting this news from the White House, given Joe Biden's health conditions and his poor performance in June. Most gold traders are looking for former President Donald Trump to come back to the office, and this is where things will get more exciting for the dollar index and for gold.
President Joe Biden Drops Out of the Presidential Race
Yesterday, 81-year-old President Joe Biden made headlines around the world when he announced on social media that he would not be running for president again. During Biden’s presidency, we saw the interest rate rise at a record pace as the Fed began the process of tightening monetary policy. The Fed, which has a clear mandate for price stability and labor market conditions, had its hand tied because inflation was at ultra-high levels. President Biden, during his term, fully supported the moves by the Fed Chairman to do whatever it takes to bring inflation under control. In the most recent months, we have seen the inflation reading flirt with 3 while the Fed target continues to remain at 2%. However, the Fed has changed its stance towards its target by saying that pre-COVID inflation targets may not be real as COVID has changed things for the better.
In his most recent speeches, the Fed Chairman has indicated that he is somewhat satisfied with the current inflation situation and that the weakness in the job market is not healthy. The job market lost its momentum purely because of the tightening of monetary policy, and gold traders have been anticipating weakness in the gold market for a while.
Even if Biden had not dropped out of the presidential race and, by some miracle, had become President of the United States again, the impact on the gold price under Biden’s presidency would have been very predictable. Gold traders know mostly how he works and what kind of influence he has on the Fed Chairman. For gold traders, the gradual path of least resistance for gold prices would remain skewed to the upside even if Joe Biden were to become president of the United States of America again.
What Does it Mean for Gold If Trump Becomes the President?
This is the most unpredictable aspect, as the actions that President Trump can implement are not the conventional, general ones that a typical president would take. I think the first thing that President Trump would do as president would be to reinstate the position of the dollar as the reserve currency. In the past five years, the sanctions imposed by the US on its targeted countries and the presence of the dollar in the system have lost a lot of value, mainly due to the major presence of gold. So, if Trump becomes the next president, his first move would be to strengthen the position of the dollar at any cost.
The second aspect that many traders are focusing on is his proposal to reduce the corporate tax rate in the US to 15%, a move he has discussed on his social media platform. This could potentially compel a considerable number of companies to relocate their operations to the US, thereby boosting the value of the dollar and potentially undermining the value of gold.
Simultaneously, a reduction in the corporate tax rate could lead to countries competing to lure major corporations to their borders. This would heighten the risk of significant financial instability, which could potentially boost the value of gold.
From a technical price perspective, the gold price has broken below an important price level, which is the 50-day simple moving average. Simple moving averages play a crucial role in determining the trend. If the price breaks above a moving average, it signifies that bulls are in control of the price. Conversely, if the price moves below the simple moving average, it indicates a move in the opposite direction. So, in terms of price trends, what is important is where the price is with respect to the moving average.
Given that the price has broken below the 50-day simple moving average, technical traders will wait for the price to either move above this average or approach an important support level, indicated by the green horizontal line on the chart. The red horizontal line on the chart indicates the resistance.
