Making gold great again: All eyes on the White House

(January 23, 2017 - by Lawrie Williams)

Will the Trump Presidency be positive for gold, or not?  On balance, it could well be as Trump is a known believer in the place of gold in the global monetary system.  Indeed, he has been reported as advocating a return to some form of gold standard, although we suspect that might be a move too far.  But it is his policies, and the effect of these on the U.S. domestic economy which will have the largest part to play. 

We doubt if he can, or will, try and influence the gold price directly.  As usual the gold price pattern – at least until the Chinese get well and truly into the driving seat which is probably inevitable long term – tends to be set in the U.S. by the policies of the Fed on interest rates, and their effect on the COMEX gold futures market.

But if people were anticipating some kind of conciliatory statement with his inaugural address they were disappointed.  The rhetoric was very much a direct follow-on from his aggressive campaign stances.  It was perhaps more divisive and decidedly populist in terms of castigating the U.S. political and financial establishment and a pledge to bring back jobs, but at what cost? 

A significant section of American manufacturing has moved to countries where wages are lower, which means U.S. manufacturing finds it tough to compete in a global marketplace.  If the Trump policy is to impose major tariffs on U.S. company products manufactured in other countries in an attempt to drive their manufacture back to the USA, then prices are going to increase which will in turn lead to a marked increase in inflation.  In short, the American public will pay.

It also looks as though President Trump will hit the ground running and at least attempt to get some of his policies off the ground quickly.  He has already started raining back Obamacare and it looks like he is going to stick to his making policy on the hoof and on twitter pattern.  Protectionism appears to be a key policy and the promise to wipe Islamic-oriented terrorist activity off the face of the earth suggests a likely alliance with President Putin’s Russia.  Trump has made no secret of his respect for Putin and his policies.  Does that suggest an attempted move to tighter Presidential control over the U.S. state and, if it does, can he carry Congress with him?

While there appears to have been no initial mention of this, confrontation with China over trade, Taiwan, the South China Sea and the strength of the Yuan looks to be a dangerous policy and could also lead to a Chinese alliance with the unpredictable North Korean regime – another global geopolitical loose cannon.

In London, we have two of the world’s most respected precious metals-specialist consultancies in Metals Focus (which provides data to the World Gold Council) and Thomson Reuters GFMS, and while we may disagree with both of them on some specifics – notably their estimates of the level of Chinese gold demand – they do both provide the most comprehensive datasets on global gold supply and demand.  They also publish their views on geopolitics and geo-economics as they affect the precious metals markets so their views should be taken seriously.  They are not out and out gold bugs and try to take a neutral stance on gold, silver and the pgms.

Writing ahead of the Trump inauguration, Metals Focus noted “While Trump’s victory is still, on balance, seen as a positive towards US growth, we believe that eventually the new President’s “wild card” approach will proliferate global uncertainties. This will in turn boost safe haven demand. Finally, in our view there remain significant risks of equity market corrections.“  Trump’s inauguration address did nothing to allay these fears – indeed in our view it endorsed them.  U.S. equity markets may have risen initially, but the realities of the Trump policies, once it becomes apparent that there’s no easy path to ‘Making America Great Again’ could well see a sharp downturn – except perhaps for exporters given Trump’s view that the dollar is overvalued.

Thus, Metals Focus believes that all the precious metals are likely to see gains in 2017 despite a cautious mood in the markets following the declines at the tail end of 2016.  The consultancy comments that most factors that boosted precious metals in the first half of last year are very likely to remain relevant throughout 2017 and, in our view, the seemingly intransigent Trump position, as set out in his inauguration address, does nothing to change this assessment.  Overall though Metals Focus sees a relatively conservative gold price average of $1,285 for the current year, although does not predict a specific price high.  To achieve the $1,285 average though this might well be in the high $1,300s, similar to, or perhaps a little above its 2016 high point of, $1,366.

Philip Newman, Metals Focus’ co-founder, who cut his teeth with GFMS, commented to us “In terms of Trump, his approach suggests he will continue to add uncertainty and perhaps help create some additional volatility in the market. Perhaps that uncertainty will start to settle down, once some actual policies are crystallized, but equally they may throw up some unexpected surprises!”

As to the other precious metals, Metals Focus is positive on all of them.  Newman feels that the gold:silver ratio will come down, thus meaning silver will rise further in percentage terms than gold.  Metals Focus is also positive on platinum and palladium.  With regard to the former the consultancy comments that it expects the platinum price to rise by around 5% in 2017, achieving a full year average of $1,030. It stresses though that this projection owes much to its outlook for gold and it does not expect platinum to receive much support from its own supply/ demand fundamentals.  It does comment that the anti-diesel rhetoric in Europe in particular could stunt the metal’s demand growth prospects.

On palladium Metals Focus reckons it likely to be the best performer among the group. It forecasts a 19% rise, to an annual average of $730, mainly reflecting the metal’s healthy fundamentals and their positive outlook. In particular, automotive demand should post another record high, driven by healthy demand in China, the US and gains, in part at the expense of platinum’s use in diesel catalysts, in Europe.

We think that some of these Metals Focus estimates may be erring on the side of caution, particularly as the Trump Presidency begins to really take effect – primarily with regard to foreign policy towards Europe/NATO and China/Taiwan which are potentially destabilizing.  These have, in our view, the prospect of not only making America great again, but gold also – with silver even more so.  We are less enthusiastic with respect to pgms, although we see the major threat here as being long term due to what we see as a more rapid advance in electric, non-polluting - vehicle technology than has previously been the case – see: A dismal future for pgms.  However the likely downturn in pgm prospects may not be with us until the start of the next decade – perhaps even further ahead as far as the USA is concerned given Trump’s apparent disbelief in man-made pollution contributing to climate change.