Latest from Brien Lundin
Friday, November 18, 2016

The Golden Age Of Trump

Gold has been reacting negatively to the idea of a Trump administration.
Don’t worry — that won’t last for long.

Dear John,

It’s obvious that Donald Trump likes gold.
One look at the Trump Tower — or any of the other imposing edifices built and decorated by the Donald — is enough to convince you that he likes the glitter of the yellow metal.
But also from an economic standpoint, Trump has voiced some very supportive opinions about gold.
For example, in a November 2015 interview with GQ magazine, Trump said “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We'd have a standard on which to base our money.”

So it seems that our new president gets it. But gold bugs shouldn’t start dancing yet.

For one thing, as Trump acknowledges, instituting a modern gold standard would be incredibly difficult to do. Even a partial gold backing of the U.S. dollars currently in “circulation” would entail a gold price well above $10,000.
While that would certainly provide a boost to our metals and mining share portfolios, the domestic and international roadblocks to a new gold standard are far too great for even a motivated Donald Trump to overcome.
So some gold bugs are hoping that Trump’s administration will at least address the blatant manipulations of the paper gold market that have kept gold partially corralled for years.
Maybe so. But he’s got a pretty full plate and higher priorities to begin with, so I wouldn’t count on help in that area any time soon.
The real issue for gold investors — and really investors the world over — is how the Trump administration is going to affect the U.S. economy.
And it is here that we’re already getting some pretty strong hints...

Ahead Of The Fed

To put it in a nutshell, the Federal Reserve is now irrelevant.
Rates are rising, but not due to anything the Fed is doing or plans on doing. They’re rising because of growing inflationary pressures...uncertainty over the oncoming policies of the Trump administration...foreign selling of U.S. Treasuries (September marked the largest amount of net foreign selling since 1977)...and more.
What’s interesting is that, after the initial (very) short-term shock of a Trump victory, the equity markets have surged ahead after the election. The bullish argument switched immediately from one based on continued ultra-easy money to one premised upon fiscal reform and rapid economic growth.

I don’t think that’s wrong — the U.S. economy, once unleashed, should quickly rebound if Trump’s free-market-oriented advisors hold sway in the new administration.

But the U.S. stock market was already priced to perfection under the easy money scenario. Now that fundamental argument has turned 180 degrees...and stocks are still priced for perfection under the new understanding.
There’s a lot of risk here. And the rising dollar is starting to combine with rising interest rates to affect the equity markets.
As far as gold, the metal has been reacting to the new “risk on” mentality, the surging dollar and rising rates. In short, it’s been falling — losing over $100 an ounce since the election.
In the near term, I think the metal will continue to be pressured. But the rise in the dollar has been so steep, and is already having such a tightening effect on the economy and the all-important stock market, that I feel it will be driven back down soon.
More importantly, the long-term view for gold remains positive, but for slightly different reasons.
As it happens, I was recently exchanging thoughts on gold’s future with Peter Boockvar, the Chief Market Strategist for the Lindsey Group, as well as the resident contrarian on CNBC these days and a great presenter at our recent New Orleans Investment Conference.
Peter and I share essentially the same outlook. But Peter, being steeped as he is in macro-economic and market analysis and coming at gold exclusively from that point of view, adds an interesting spin to it. Here’s how he put it to me:

“My initial reaction to the Trump election was similar in that the gold bull market was now not going to be as robust. Yellen will certainly fill out her term until January 2018, but a more hawkish Chairman will likely fill her spot thereafter. The rise in nominal rates that I foresee may also happen more quickly than I previously thought.
“The bull case though takes on a somewhat different complexion in that inflation risks are now more real and we can assume that the Fed will be very slow in responding to it. Thus, while nominal rates are headed higher, real rates will continue to fall. Also, we have to assume massive new debts and deficits will become more obvious and could become a problem for the US dollar.
“Also, we have to fear now what happens to the bond markets in Europe if inflation starts to flare up there, which it will. Draghi will be very slow in adjusting policy in response.
“While rates and inflation won’t be at the absolute level of the 1970s, the trajectory might be the same, which in turn would be similarly bullish for gold.”
My view is that, although gold will continue to be pressured in the near term by dollar strength, that trend will soon reverse.
And if we look further down the road, the realities of the economy under Trump — including still-high debt loads accompanied by rising price inflation — will soon become apparent, to the great benefit of gold and gold investors.
So keep your powder dry for now, as I foresee a great buying opportunity coming up in December.

All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference