Trump and Gold

Posted | 11/05/2016 / Views | 4356
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A scant few would have predicted Donald Trump would get this far.  Fewer expect he will make it to the White House.  But the guy has left a trail of such predictions in his wake and as they say, in America anything can happen.  So let’s flirt with some speculation on what it would mean for gold and silver should he actually pull it off…

Firstly though, let’s revisit why he’s got this far in the first place.  If you were to pick one overarching reason it is that he is anti-establishment.  That oligarchy establishment has not done main street Americans much good for some time now.  We often write how all the $3.5 trillion of printed money (via QE) and zero interest rates has done is enrich the top 1% - Wall St not Main St.  The NFP employment figures Friday night (which we will discuss at length in this week’s podcast) reinforced the theme we often report on of better paying full time productive jobs being replaced with poorer paying part time services jobs.  This trend sees the bottom 90% of American families with no more net worth today than 30 years ago and with lower real household incomes than 25 years ago.  That sort of stuff can create a groundswell of discontent.  Add to that questionable war entries enriching major donors etc etc.  Enter Mr Trump – beholden to no one and the catchphrase “we aren’t winning anymore”.

Its early days but he has made 2 positions clear that already have major implications for gold (not, of course, discounting that a global loss of faith / fear could well inflate gold alone).

Firstly, he has just bluntly said he would consider essentially partially defaulting on the massive and burdensome $19t US debt.  This guy has had 4 bankruptcies himself where creditors get paid a fraction of what they were owed and he moves on to make more millions.  What he may be missing is US Treasuries are considered the world’s risk free ‘investment’.  The 3 month T bill rate is used as the base risk free rate around the world.  Should he decide to ‘give them a haircut’ you could well imagine what would happen to yields.  In fact you don’t need to imagine, just cast your mind back to August 2011 when Congress nearly saw the US default on its debt as they refused yet another debt limit increase.  That saw US Treasuries yields reach a 29 month high (and hence price crash the same) and gold (the world’s other safe haven) spike 25% in just 2 months.  And that was just on clear political posturing in Congress.  Should Trump actually go through with his default plan who knows where gold could go…

His other position is that he will markedly increase spending and decrease taxes.  Simplistically that would see inflation come about (and the risk of hyperinflation with that $3.5t of freshly printed money that to-date has had no Main St velocity) and a further increase in the already unprecedented and gargantuan US $19t debt.  The former would see the Fed forced into raising rates more quickly.  That would have the 2-fold effect of higher servicing costs on that debt but also the bigger elephant in the room (as we mentioned yesterday) – the pressure on the mountain of Emerging Market debt in the system through the higher USD.  That could force the biggest EM player, China, to devalue the Yuan and/or set off an EM crash.  We got just a glimpse of the effects of a Yuan devaluation last August when the S&P500 fell 11% in a couple of days.  Gold rose around 9%...

Trump is on record as loving gold.  He may well nicely feather his nest, so to speak….