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Why President Trump is good for gold

donald trump

As the results of the US Election came in, the news that outsider Donald Trump was going to be the 45th President of the United States briefly saw gold trading at $1337/oz while the stock market was sharply lower. Less than six weeks later, gold was trading over 15% lower at $1122/oz. The belief that Trump’s policies would be reflationary led stocks and the US dollar surging higher as bond prices fell and hence the fall in gold. Or so the media reported it for the time being.

Hinde Capital has managed a gold fund since 2007. Many people assume that we must be gold bugs, conspiracy theorists and always bullish. Nothing could be further from the truth. We just believe that gold should be a reasonable part of everyone’s portfolio and rebalanced accordingly and that a majority part of that gold should be in the real thing, ie physical gold bars in a secure vault in Switzerland. Not ETFs and not too many mining shares.

There are times when we are more optimistic on gold than others and vice versa. If you asked us to imagine the best environment for price appreciation in gold we would probably make a list starting like this:

  • A weakening US dollar from an expensive level
  • Real yields to be low or negative and potentially falling with inflation rising
  • Increased global concerns about issues like nuclear war, climate change and political upheavals
  • A stock market priced to perfection with very high Price/Earnings multiples where a severe price decline couldn’t be ruled out
  • Growth peaking and earnings weakening

Source: dqydi.net

 

Source: Bloomberg & Hinde Capital

 

The Trade weighted USD index in December 2016 was at its highest level since 2001 as the rising US yield environment saw huge dollar inflows but in the last two weeks, the Trump administration has made it very clear that it believes the world currency devaluation policy whether in China or Japan, Europe or UK is definitely not in the US’s best interest. The days of the US strong dollar policy rhetoric may well be over. Trump is in town, tweeting his unhappiness with the weak currency manipulators. The USD has reacted accordingly, it may have much more to go despite the yield differentials.

Nominal and real yields rose on Trump’s election mainly because inflation rates are monthly numbers and don’t move immediately. Even with inflation bonds to guide us, the eventual outcome may be that inflation rates move higher while nominal interest rates don’t rise as quickly as the Federal Reserve worries about growth and earnings peaking. Our friends at Variant Perception remind us that Gibson’s paradox tells us that an excellent predictor of gold prices is the level of real interest rates, the lower or negative, the higher the rate of return for gold in the coming months.

Source: Bloomberg & Variant Perception

 

Source: Bloomberg & Hinde Capital

 

Source: Bloomberg & Hinde Capital

 

The US stock market is priced to perfection if we look at the Cyclically Adjusted Price Earnings ratio which at 27 is one of the highest on record. Historically exceptionally high valuations have led to sharp corrections. John Hussman’s favourite chart is the National non-financial capitalisation/ national non-financial gross value added including estimated foreign earnings(, a variant on Warren Buffett’s market cap/ GDP) which suggests currently is the worse time to invest in US stocks ever.

Source: Hussman

 

The following is an excerpt from www.hindesightletters.com

The adjustment to the Doomsday Clock last week to 2.5 minutes to midnight, the closest since 1953 was not welcome sensational news. The Clock represents the hypothetical global catastrophe as ‘midnight’ and The Bulletin of the Atomic Scientists’ opinion on how close the world is to a global catastrophe as a number of ‘minutes’ before midnight. Since its inception in 1947, it has focussed primarily on the risk of nuclear Armageddon but since 2007, climate change has been taken into account, as well as political climate potentially now. It is no surprise that the end of the Cold War in 1991 signalled the furthest point (17 minutes) from midnight. Unfortunately, the outcome of the twice yearly meeting recently had to take into account President Trump’s policies on nuclear weapons, climate change and the rise of the popular vote which led to the first ½ minute adjustment to the clock, back to a level last seen in the early days of the nuclear age where war seemed imminent. Happy New Year.

 

Source: BBC

 

Every fundamental box is ticked for an environment that is conducive for higher gold prices but what about from a technical perspective.

Like most inherent value traders, I like buying low prices when the trade is not crowded with long speculative positions. Gold is currently 12% lower than last year’s high and 35% lower than in 2011, when the dollar was at its weakest coincidentally. The huge long speculative positions in Comex gold contracts and ETF holdings from last year have largely been washed out.

Source: Bloomberg & Hinde Capital

 

Source: Bloomberg & Hinde Capital

 

And so, I arrive at my conclusion. Fundamentally I couldn’t imagine a better macro-economic backdrop for investing in gold. I fear, as well as is suggested with the Doomsday clock that we have entered in to a new world with the surge in populism and outright nationalism, protectionism and heightened nuclear concerns. While from a value and technical level, gold is cheap at $1220/oz.

While my list may not be complete and others may focus on other factors, Trump has made gold a very good investment at these levels.

 

Link to this article: : http://www.goldmadesimplenews.com/analysis/why-president-trump-is-good-for-gold-12915/

Posted by on Feb 9 2017. Filed under Analysis. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.
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