On Wednesday, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication?
There are a few interesting pieces about sampling, accounting, and casting of gold. However, for us the most important text is Jonathan Butler’s article entitled “Gold vs. Trumponomics” which explores the challenges and opportunities for gold in the brave new world of ‘Trumponomics’. Let’s analyze it.
Trump’s surprising victory in the U.S. presidential election triggered a reflation trade, boosting equities and hitting safe-haven assets such as U.S. Treasuries and gold. However, the reflation trade reversed in late March when Trump failed to repeal and replace Obamacare. What will Trumponomics imply for the gold market, according to the author?
First, Trump promised huge additional government spending, which could be potentially inflationary (due to increased demand for commodities and jobs) and thus supportive for gold over the long term. However, Republicans will not allow for higher budget deficits, so the inflationary effects would be only limited, if there are such effects at all.
Second, the expectations of tax reform were bullish for equity markets. However, investors neglected Congressional restrictions on increasing the budget deficit. Hence, gold could gain when the euphoria in the equity markets fades.
Third, Trump’s trade policy should be positive for the yellow metal, as gold will remain a hedge against the possibility of trade disputes and a decline in global trade. Although trade protectionism may strengthen the U.S. dollar, it will not have to be negative for bullion if a climate of uncertainty prevails.
Summing up, Jonathan Butler believes that the Trump reflation trade could be just an “expression of hopeful sentiment rather than a new economic paradigm”. Thus, its reverse should benefit the yellow metal. We generally agree with his analysis, however, it’s still too early to declare the failure of Trumponomics. As the chart below shows, real interest rates have been rising recently, which is a significant bearish driver for gold. Stay tuned!
