Gold sold off sharply since the election based on the belief that President-elect Trump will bring higher growth. This sell-off makes little sense for those who understand that gold is an investment in monetary policy failure and the destruction of paper currencies. Central banks remain hell-bent on printing money and creating inflation in order to deal with epic levels of global debt. Donald Trump’s election not only doesn’t change that reality but likely exacerbates it since the President-elect plans to take dramatic steps to promote economic growth that will further increase US debt. Investors should use recent weakness in gold to add to positions.
The stock market continued its post-election rally last week though things may be calming down. The Dow Jones Industrial Average added 284 points or 1.5% to close at a record high of 19,152.14 while the S&P 500 jumped 31 points or 1.4% to a record 2213.35. The Nasdaq Composite Index also rose 1.5% to a new record 5398.92. The small cap Russell 2000 Index, however, left these three large cap indices in the dust since the election as investors convince themselves that a new anti-regulation president will lift the boot of the government off the backs of small and mid-sized businesses. The Russell rose for 15 straight trading sessions and is up 15.8% since the election.
But that doesn’t mean gold is doomed.
Investors who believe the yellow metal is headed down long-term are missing one very important thing.
Trump’s presidency should be good for gold. Here’s why.
Trump Is Bringing The One Thing Gold “Needs”
The idea that a Trump presidency will bring higher economic growth that will be bad for gold is shortsighted at best.
Frankly, this thesis misses the other thing that Mr. Trump will bring (and that already exists though it is not picked up by phony government statistics), which is higher inflation. Rather than selling gold, investors should be using prices under $1220/oz to add to their positions.
I receive a lot of questions from readers about the drop in the price of gold, and those questions tell me that some readers are missing the point that I repeatedly make about gold. Maybe I am not being clear enough. You should not be trading gold or buying it for a short-term play. Gold is a generational investment based on the fact that central banks are destroying the value of paper money.
You should welcome a drop in the price of gold because it offers the opportunity to buy more at a lower price. If you are trying to buy gold to make a short-term profit, don’t do it. That is not why gold is a good investment. Gold is a good investment because years from now it will be worth a lot more than it is worth now – because the dollar bills in your pocket will be worth a lot less than they are worth now. Clear?
In addition, keep in mind that stocks won’t rally forever.
Investors might want to take a breath since the market wasn’t cheap to begin with. One of the most useful measures of stock market valuation (and one that Warren Buffett reportedly focuses on) is he ratio of the S&P 500 Market Capitalization-to-GDP. That ratio is up to 125%, a historically high level. There is a lot of year-end performance chasing after another year in which active managers failed to earn their fees. It would not be surprising to see a lot of these gains reverse in January, if only to allow the market to collect itself while it waits for the legislative assault of President Trump’s first 100 days.
Stocks Have a Tough Road As We Enter The New Year
Not only that, but a lethal combination of higher rates, higher yields and a stronger dollar could easily wreak havoc on stocks as we move further into 2017. At one point last week, 10-year Treasuries traded above a 2.4% yield before closing at 2.36%, up 0.56% in the last month. The 30-year yield jumped 0.46% in the last month to 3.0%. Yields are not yet high enough to quash the stock market rally, but the direction is troubling. The combination of higher yields and a stronger dollar – the US Dollar Index ended the week at 101.50, its highest level in a year – poses headwinds for corporate profits that will start having a meaningful impact in mid-2017. The impact could be counterbalanced by a significant cut in corporate tax rates and regulatory relief, however, so it is more difficult than normal to predict S&P 500 earnings for 2017 at the moment.
I would not lose any sleep about higher rates hurting stocks until the 10-year yield hits 2.75%, but we need to see how the market reacts when the Federal Reserve raises rates in mid-December. While higher yields and a stronger dollar might have kept the Federal Reserve from raising rates before, they are unlikely to do so now. The Fed finally has run out of excuses to keep interest rates at 25 basis points, which for all intents and purposes is the equivalent of zero. With a new, economically savvy president in the White House who called out the Fed for its feckless policies during the election, the Fed can’t hide behind Janet Yellen’s skirts anymore and will raise rates by 25 basis points in December. That will still leave interest rates well below where they need to be and the question for 2017 will be whether the Fed will move more quickly than the market expects to normalize short-term rates to 2%. President-elect Trump will have an opportunity to reshape the Federal Open Market Committee with new appointments and we can only hope he will nominate individuals with real world business experience to replace the clueless economics professors who inflicted so much damage on the American economy.
Higher rates will come at a price, however. Mr. Trump intends to cut taxes and raise infrastructure spending that could result in even larger federal budget deficits. Last year, the federal deficit rose by $1.4 trillion. The bond market is not going to react well to plans that add trillions of dollars of additional debt to the federal balance sheet even if Mr. Trump argues that the spending will result in higher economic growth. Even the most economically illiterate among us will easily see that the numbers don’t add up. In order to retain credibility and address debt crisis staring the country in the face, the new president must deal with entitlement reform and propose pro-growth tax reform that rewards productive rather than speculative activities. It also appears his infrastructure plan will focus on tax incentives for the private sector rather than outright spending, which would be a good thing. For all the rhetoric surrounding his plans, it remains to be seen how he will pull off an incredibly difficult balancing act in the context of a $20 trillion and rising federal deficit and seriously strained state and municipal finances. Investors would be wise to temper their enthusiasm with a reality check about what can actually be achieved before chasing already expensive stocks to new highs.
And they should take advantage of the current “bargain” prices to buy gold – because I can guarantee you, it won’t be this cheap forever.