Trump-Induced Bull Run In Gold Continues Unabated
Gold continues upward on the trend reversal following the 2016 election.
The outlook for increasing deficits and debt is bullish for the precious metal.
Geopolitical risks are rising as Trump replaces administration diplomats with "hard-liners".
Meantime, China's new yuan based oil futures contract could put more pressure on the American "petrodollar".
Source: APMEX
The outlook for gold - both bullion and the SPDR Gold Trust ETF (GLD) - is as bullish as I have seen it in my lifetime. As indicated in my previous Seeking Alpha articles in this series (see Gold: The Possibility Of A Trump-Induced Bull Run and Part II), the investment thesis is fairly straight-forward:
Rising U.S. deficits and debt Rising inflation Increasing geopolitical risks and uncertaintyThat the outlook for gold is the most bullish in my lifetime is saying something considering recent history. At the turn of the century, gold was trading at a mere $280/oz and rose to $1,864/oz by September of 2011 - a more than 6x increase in eleven years.
However, gold generally fell straight down from over $1,800 to a low of ~$1,150 - that following a $150/oz post-election sell-off as indicated on the red arrow in the graphic above. That was when I wrote the Seeking Alpha article suggesting that the election of Trump and a Republican Congress was bullish for gold and that investors should be buying, not selling. That call was spot-on and clearly identified the trend reversal. Gold has risen 17% since.
There is no reason the upward trend will not to continue. In fact, there are several reasons why the uptrend could accelerate.
Deficits & Debt
The outlook is clearly for rising US deficits. After the tax reform legislation passed last year, the USA Today reported that "2018 could be the year the dam bursts on the federal deficit" and suggested the annual deficit could top $1 trillion.
And that was before $1.3 trillion spending bill was signed into law on Friday. The Washington Post reported that Senator Bob Corker said the bill would add $2 trillion in debt. While Corker feigned displeasure at the bill, he was also against the tax reform package passed last year. That is, until some choice commercial real estate tax breaks (the so-called "Corker Kickback") were added, then Corker voted for the tax-reform package. Some are asking where are the Republican "tea party" members that were so outspoken about debt and deficits during the Obama administration? At the end of the day, there could be some truth to the adage, "Republicans only care about the deficit when a Democrat is President".
Regardless, the effect of the spending bill on the price of gold was immediate. The precious metal jumped nearly $20/oz on Friday. Meantime, currency traders were also on guard. The value of the US dollar Index closed down 0.37% on Friday, and is now down 10% since Trump took office:
Source: MarketWatch
The move down in the US dollar Index is notable considering the Federal Reserve has increased the Fed Funds rate 0.25% 4 times since Trump office, taking it from 0.75% to 1.75%. This seems agreeable to the Trump administration considering comments the Secretary of the Treasury Steven Mnuchin made in January of this year (see Gold Takes Off As Mnuchin Talks Down The Dollar At Davos).
This is all happening while the Federal Reserve indicated last Fall it was, finally, going to unwind its massive $4 trillion+ balance sheet. That was supposed to happen at ~$10 billion/month. The CME Group's weekly report indicated that the Fed's balance sheet is down $64 billion from the beginning of balance sheet unwinding in October 2017:
Source: CME Group
The Fed's unwind, happening at a time in which the US Treasury will need to simultaneously introduce substantial new debt to fund the growing deficit as a result of the recent tax and spend bills, begs the question: how far will interest rates have to rise on the debt for buyers to step to the plate? If interest rates lag too much, the US dollar is likely to continue its decline. Since gold is priced in US dollar, that is bullish for the precious metal.
Geopolitical Risks
The recent firing of Secretary of State Rex Tillerson was an indication that Trump wants to take a harder line toward North Korea as opposed to the diplomatic effort favored by Tillerson. And, as if one nuclear confrontation isn't enough, the replacement of National Security Advisor General H.R. McMaster with hard-liner John Bolton has many already nervous allies concerned that Trump is ready to rip-up the Iran nuclear accord.
Iran has already said it will not renegotiate the nuclear treaty. And Saudi Arabia has already said if Iran develops nuclear weapons it will as well. So while the Trump administration says it wants to denuclearize the Korean peninsula, it is agreeable to a nuclearized Middle East.
The bottom line here is that the revolving door in the Trump administration continues to whirl at an astonishing and unprecedented rate.
Meantime, the recent Facebook debacle with Cambridge Analytica, and the ties to Russians "fake news" agenda and election meddling, is another very disturbing geopolitical development. As is the recent nerve-gas attack in the UK, which - once again - Trump was slow to condemn Putin and instead called to congratulate Putin on his re-election. This led to one retired 4-star general to say it was "simply astonishing" that Trump won't criticize Putin.
If all this weren't enough to worry about, the recent trade tariffs tit-for-tat cratered the DJIA this week. And while the US certainly has a case against China in both the trade and intellectual property arenas, it is the way the Trump administration is going about it that concerns some analysts. Many following the trade issue don't seem to understand that China and Japan, combined, own $2.5 trillion in US debt. As Peter Schiff describes, the "nuclear option" for these countries if the US pushes a trade war is to simply threaten to put a substantial portion of this debt onto the market. And, as just discussed, this could happen just as the Treasury Department reportedly plans to auction off around $1.4 trillion in Treasuries this year.
Obviously, were the "nuclear option" to be implemented by either China or Japan, interest rates in the US would have to rise substantially in order to sufficiently entice buyers of the massive amount of US debt that would hit the market.
End of the US Petrodollar?
As if all these US dollar cross-currents were not enough, the Wall Street Journal reports that China, now the world's largest importer of oil, is preparing to launch its own yuan-based oil futures contract on Monday, a move set to shake up the global crude market (and currency markets...) currently dominated by US dollar denominated trading in London and New York.
I reported on this effort by the Chinese last Fall (see China's New Gold-Backed Oil Futures Contract Cuts Out The US Dollar). Many SA users were critical of my opinion on this matter (see all the comments). However, the fact is that China wants to pay for its oil imports in Yuan at the same time that many OPEC countries are trying to find a home for all the oil they used to export to the US. I believe China will be successful in this effort. And it is just another reason that the US dollar could come under increasing pressure this year. And of course that is good for gold.
Summary & Conclusion
The outlook for gold is very bullish and I see it moving significantly higher over the coming years and certainly rising to a new-high before Trump's four years is over. Because the truth is this: Congress, instead of paying down the debt in "good times" (i.e. record low unemployment), has embarked on a very dangerous path to dramatically increase the federal deficit in debt. And despite a 1% increase in the Fed Funds rate over the past year, the US dollar Index is down ~10%. That is a crystal clear message in my opinion.
Investors would do well to heed to old adage of holding 5-15% of their net wealth in precious metals, specifically gold bullion. For investors with an average net worth of over $5 million, I would say the percentage should be even higher. That's because you have more to lose.
Disclosure: I am/we are long GOLD BULLION.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!
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