With Trump’s aggressive policy on lowering taxes, building a wall and bringing American companies back home; how will these policies affect the price of gold in the long term?
Tour Donald Trump’s penthouse apartment, his private jet, or even the lobby of his namesake tower in Manhattan and one thing is plainly obvious – the President-elect loves gold. Similarly, gold is likely to love a Donald Trump presidency, mainly because he is a seen as a non-traditional candidate. The market will react to Trump in one way or another, but common wisdom holds that he will create a ripple effect of uncertainty that will have many investors feeling like they are skating on thin ice. Gold futures are largely contingent on the volatility of our soon-to-be inaugurated leader – and he’s proven his ability to shake up the mainstream with nary a blink.
Long Term Drivers of Gold Pricing
Interest rates: To accumulate wealth when holding gold, one must count on an increase in the value of the metal that at least outpaces the cost of inflation. Gold pays no interest, so choosing gold over, say, mortgage backed securities, eliminates the potential to earn interest or dividends. It does, however, permit long-term wealth accumulation and acts as a hedge against market volatility. When interest rates go up, gold prices often fall. And interest rates are poised for an increase in late 2016 and throughout 2017 when the FOMC meets at its predetermined intervals.
The verdict? Trump’s bombastic style might not be enough to counteract a rise in interest rates. Rising rates also indicate slightly better confidence in the economy, which isn’t a boon to gold prices. 2017 might be a great time to acquire gold at one of many likely dips throughout the year.
Domestic and Global Markets: The world is a little on edge right now. Trump winning the presidency “wasn’t supposed to happen,” according to many foreign leaders who must now decide how to effectively communicate with the President-elect. These leaders are so uneasy, President Obama has been making personal visits to reassure them that the United States is a strong, supportive, ethical, and reliable ally going forward. World leaders are concerned that Trump will turn the U.S. into more of an isolationist nation, removed from the constructive talks and activities that the nation has been a part of for decades.
What will happen to the long-term price of gold if Trump continues to impart uneasy feelings on other world leaders? The likely result is a gradual yet sustained increase in the price of gold throughout the Trump presidency.
Global Oil Industry: The industry responsible for the extraction and refining of crude oil into our beloved finished product is considered a volatile sector in the world economy. Oil is often the culprit waiting in the wings when geopolitical issues rear their head around the globe, and that means that the price of crude oil is often correlated to the price of gold. But while gold and oil generally rise and fall in a hip-to-hip manner, today we’re seeing gold rise as oil plummets.
Gold generally trades at about 15 times the price of a barrel of oil – a ratio that has held relatively steady for decades. But today, gold and oil are trending in different directions and the indicators show that gold may be better positioned at 30-35 times the price of a barrel of oil. Since gold is trading around $1,175 per ounce right now and a barrel of oil is right around $49, this equates to gold being valued at 24 times more than a barrel of oil. At 30 times, gold would trade near $1,350 an ounce, a figure that many analysts forecast over the next few months. The verdict? Based on oil prices and recent trends, gold may be ready for a spike of nearly 10%.
The long-term gold price impact of a Donald Trump administration remains to be seen, but one thing is certain – uncertainty in the domestic and global markets often lead to spikes in gold pricing.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.