America Has Spoken (January 20, 2017)

Donald J. Trump was officially inaugurated as the 45 President of the United States.  In fairness, this is a happenstance that few in the world thought they would ever see.  That is, of course, except for the nearly 63 million Americans who voted for the billionaire real estate developer and entrepreneur.  So, what can we expect from the new President’s economic policies and how might they benefit investors who own physical gold?

During the Presidential campaign Mr. Trump offered that his policies would create 25 million jobs by revising the tax code, reducing government regulation, changing US trade policy, focusing on American energy, and cutting government spending let’s look at each of these.

The Trumponomics plan to create 25 million new jobs in the next decade is a little light on detail and maybe a little heavy on optimism.  But, I’m all in on the hope that it can be achieved.  The President-elect’s plan boils down to getting the US economy growing at a sustained 4% clip for the next decade.  That’s ambitious – but doable.

Since 1950, annual US GDP growth has averaged well above 5%.  This is the case even after the post-World War II boom, which as the chart above shows ended in the 1970s.  The United States has experienced declining GDP growth rates since the early 1980s.  But, many of the President-elect’s economic policy comments do sound Reaganesque.  So, if his administration can pull it off, the United States economy could grow at rates not seen in decades.

The Federal Reserve Bank of St. Louis.

For gold investors it is well to point out that during the Reagan Presidency the high inflation rates of the previous decade declined in a meaningful fashion.  However, they remained well above 2%, which the US Federal Reserve has pegged as its target.

The Federal Reserve Bank of St. Louis.

And, as historians will confirm, inflation is good for hard assets such as gold.Mr. Trump’s promise to revise the tax code has one important component as it relates to gold prices.  Reducing the corporate income tax rate ought to have the intended consequence – the repatriation of trillions of US dollars.  But, it will likely have another unintended effect.  The likelihood of lower tax rates in the United States will also attract foreign investment in domestic plant and equipment.  As overseas companies set up US subsidiaries and pour money into the US economy, the dollar is likely to strengthen further relative to other currencies.  This could put downward pressure on gold prices.

President-elect Trump has also vowed to reduce government regulation.  In and of itself, this does not appear that it would have any impact on gold investors.  But, a component of Mr. Trump’s plan to reduce government regulation is to also undo most of the Executive Orders signed by President Obama.  Among interest to gold investors is Executive Order 13603 which revised and renewed  issued in 1933 by Franklin Roosevelt giving the US government the right to seize gold from private investors.  The removal of this order should have a demonstrably favorable effect on gold investors.

The most important aspect of President-elect Donald Trump’s economic plan is his stance on foreign trade.  And, this is the issue that could have the most dramatic impact on the price of gold.  Just his use of the term “America First” has created nervousness among world leaders.  This even though not one word of policy specifics has been uttered by anyone in the developing Trump administration.

The unease with the idea that America would pursue protectionist trade policies was a key component of the speech given yesterday at the World Economic Forum by Xi Jinping, President of the People’s Republic of China President Xi’s speech to Davos This is a critical issue since restricted trade, let alone a trade war, between the United States and China, could have negative repercussions throughout the global economy.  Whether or not a trade war is probable, the possibility of one is likely to have a negative effect on the value of financial assets.  And, for this reason alone, investments in gold make sense.

Another aspect of the President-elect’s suggested economic policies that could affect the price of gold is his stance on American energy.  As we experienced in 2014, the collapse of crude oil prices put downward pressure on most commodities.  While an economic revival of the American oil patch should not put a lasting weight on commodity prices, it may produce more volatility in energy prices.  The uncertainty this could inject into the global financial system could be bad for financial assets, which I suggested earlier, would bolster the case for including gold in diversified investment portfolios.

 
And, finally, it is difficult to predict how cutting US Government spending might affect the price of gold.  Too much cutting risks economic slowdown; too little affects budget deficits.  This is a double-edged sword.  Unfortunately, a double-edged sword can cut both ways.  As a cautionary measure, therefore, I would encourage investors that don’t already have an allocation to gold in investment portfolios to consider it.

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