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A Post-Election Technical And Fundamental Assessment Of Gold

|Includes: SPDR Gold Trust ETF (GLD), SLV

Last week, the upset in the US Presidential Election provided quite a fireworks show for those who were watching the markets.

After moving down more than five percent on Tuesday evening, US stock futures rebounded furiously. CNBC cited a note from Citi, which mentioned the volume in the eMini S&P futures was about seventeen times the average daily volume 1.

The gold markets also moved sharply higher on volume levels not seen since the bear-raid of April 2013. More than 780,000 gold futures contracts traded on November 9th as opposed to the 656,000 that traded on April 15, 2013. (see charts below for volume comparison between these periods of time.) The most recent comparable surge in volume (also included in the charts below) was on June 24th when the Brexit announcement was made.

Price has settled lower since then at $1,225, having retraced about 50% of the move from the lows of December 2015. In my opinion, the fact that such massive volume has not produced a similar sell-off as in April 2013 is noteworthy. Although the bears have commanded the recent sessions since the election, the lack of downside follow through is telling when considered in the context of such massive volume. I'm not convinced the volume is confirming the price action, as it did in April 2013. The gold price declined over $400 from April 2013 to June 2013. Gold has only declined about $100 since the election. Again, this lack of further weakness should be noted and monitored going forward when viewed in the context of such massive volume.

Looking at the fundamentals, I believe that Trump's infrastructure plan will require more deficit spending, which should be bullish for gold. As bond prices go down, bond yields (interest rates) go up. The bond markets have been selling off since summer, and I've been wondering why. I believe that the rate of inflation is one of the most important factors affecting interest rates. Many pundits claim there is no inflation now, and recent deflation across the commodities and energy sectors supported that perspective. Now though, the bond markets seem to be disagreeing with them. Since the election, rates on the 10-year Treasury have gone from about 1.80% to 2.22%. A higher cost of capital is a headwind for businesses. It also means it costs businesses more money to finance share buybacks and dividend payments. On the flip side, the perception is that the Trump administration is "pro-business," and is supported by some of his comments about deregulation.

If the bond markets are signaling higher inflation expectation, and expectations of weaker US business growth, what does that mean for the price of gold? What does it mean for the US stock market?

I'm of the opinion that gold prices will head higher in the long term. In the near-term, I expect volatility as more uncertainty and unknowns must be clarified during the transition from the Obama Administration to the Trump Administration. I continue to believe the fundamentals support the case for diversification into precious metals. A minimum 5% allocation is, in my opinion, a great example of being a prudent investor. Gold bugs may say 5% is too little, and perma-bears may say it's far too much. I prefer to detach myself from either school of thought.

Although the US equity markets have moved sharply higher recently, I believe interest rates must be kept in mind going forward. I'd feel more comfortable seeing the S&P and Nasdaq participating more in the rally, but I think it's likely that stocks will rally through the end of the year. I continue to hold long positions in stocks that I believe will do well long-term, such as CSCO and POT. I also hold speculative positions in AVID and TWTR, and maintain long-term emerging market exposure through OGZPY.

Remember, diversification comes from using different markets to invest in non-correlated assets. In my opinion, gold and precious metals are a great example of a different asset that can be used for diversification in one's investment portfolio. In the event of a 2008 style market crash, I expect that gold's correlation to the stock markets will revert to negative, meaning that precious metals should behave inversely to stocks. In the long term, gold should do well in terms of reducing a portfolio's overall risk.

April 2013 - December 2013

December 2015 - YTD


Disclosure: I am/we are long GLD, SLV, CSCO, POT, TWTR, AVID, OGZPY.

Additional disclosure: My exposure to precious metals is not through GLD and SLV; however, I felt those were the most accurate instruments to select using SA's Disclosure menu. To be clear, I am long precious metals.