Gold Benefiting From Weaker U.S. Dollar Following U.S. Midterms

(Kitco News) – A shift in the political landscape following Tuesday’s midterm elections in the U.S. is only having a material impact on gold prices as the U.S. dollar loses some momentum.

As many political pundits expected, the Democratic Party regained control over the House and the Republican Party retained control over the Senate, expanding their majority by five seats.

While the U.S. dollar is losing some momentum on Wednesday, pressured by the threat of political gridlock in Washington, many analysts say that the election outcome won’t have a significant impact on the domestic economy, which could ultimately prove to be negative for gold.

“With Congress divided, Trump and the Senate Republicans won’t be able to make any major legislative changes without the approval of Democrats,” said Andrew Hunter, U.S. economist at Capital Economics. “This means that the Republicans’ hopes of a second round of tax cuts are probably now dead in the water. That may explain the modest softening in the dollar and decline in Treasury yields this morning.”

Jameel Ahmad, global head of currency strategy and market research at FXTM, said that while the U.S. dollar appears overvalued, it is too early to tell if the election results will have a significant impact on its uptrend.

“At the moment we do see some near-term pressure on the USD, but the jury is very much out for how long this could last,” he said. “Investors would need to see some fundamental shifts that the outcome in the midterms could really change matters behind the scenes to receive the needed encouragement to drag the Greenback further lower moving forward.”

Currency analysts at Brown Brothers Harriman said that they also see U.S. dollar weakness as a short-term trend.

“While the knee-jerk reaction today is to push US yields down and sell the dollar, we think the previous drivers will re-assert themselves,” he said. “That is, wage and price pressures will continue rising, leading the Fed to tighten in December followed by at least three hikes in 2019.”

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he doesn’t think the election results are overly bullish for gold, even as it creates further geopolitical uncertainty.

However, he added that he is still optimistic that gold could creep higher because of rising inflation pressures.

“We are starting to see higher commodity prices across the board and rising wages. This creeping inflation will provide an important floor for gold,” Cieszynski said.

Commodity analysts at the Hightower Report said that the U.S. dollar’s reaction to Tuesday’s election could be another signal that the greenback has hit its top.

“The election result seems to have shaken out as net positive to gold and silver, with the potential investment/dollar driven gains healthier than safe-haven interest in the long run,” the analysts said. “In the short term, currency and equity market action lean in favor of the bulls and a return to the November high at $1,239.30 in December gold could be an easy near-term target.”

By Neils Christensen
For Kitco News


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