Is President Trump Setting Up A Huge Gold Trade?

Gold prices have trended upward since President Trump took office January 20th of this year. Based on what the Trump administration has set out to do, gold prices may still have a long way to go.

The dollar has been weakening since Trump has taken office. The President has labeled China and a couple other exporting countries as 'Currency Manipulators' and mentioned he would take action to stop this. Countries with a significant portion of GDP coming from exports are incentivized to weaken their currencies to make their products less expensive, and thus more competitive in foreign sales.

The Dollar's weakness shouldn't come as a surprise, and it wouldn't be a surprising if the Dollar continues its downward trend. First, Trump is pro-domestic production, wishing to reduce imports and increase domestic product sales abroad. To accomplish this, he wants other countries to stop weakening their currencies and presumably let our Dollar weaken to make our products more competitive for global trade.

Trump's U.S.-first policy may be a misinterpreted signal by the general market; given we are an import-heavy economy, tightening borders and shrinking the trade deficit actually leans bearish for the Dollar which in turn is bullish for gold.

Second, one of Trump's campaign promises was to swiftly deport undocumented immigrants from the country. Estimates from the Pew Research Center put this at over 11 million people, which is over 3% of the country's population.

The political, moral, and even if realistic debate aside, if non-citizen workers vacate lower paying jobs, it could put incredible wage pressure on industries looking to fill those positions with a minimum wage floor and possible benefits. Wage inflation is some pundits' most important factor in predicting currency inflation. The president may back away from these promises, but if he doesn't, a sudden 3% population drop can be a big shock to an economy.

And thirdly, Trump is proposing multiple other inflation-tempting policies that could further weaken the Dollar such as cutting taxes, increasing deficit spending, and repatriating trillions of U.S. Dollars hoarded overseas. Because of these policies, it becomes hard to fathom that this administration is prioritizing a stronger Greenback.

With so many inflationary policies on deck, why hasn't gold's valuation jumped even higher? Perhaps gold hasn't taken off yet because volatility levels have been unbelievably low. In fact, volatility has been almost non-existent with not even a 5% correction since President Trump took office. The S&P 500 has continued to reach new all-time highs throughout the year.

Confidence in continued earnings growth has supported the recent lack of volatility. Unfortunately, earnings reports have not been good leading indicators of equity selloffs. If earnings always tumbled a quarter before stock prices plummeted, we would all be much more successful investors thanks to this helpful cue. The reality we are faced with is that prices often fall first and subsequent decreased confidence and increased financing costs cut growth projects and hinder future earnings. Regardless of the trigger, correctly predicting the timing of the next equity drop proves immensely challenging, and owning a small core allocation to protective assets such as gold or long volatility products may help provide insurance for the unknown. Yes, volatility has been muted recently, but gold prices have likely factored in an expectation that this period of calm will continue.

What ends the calm is anybody's guess, but Trump's foreign policy and edgy comments could spark volatility and a rush to haven assets at any time. Trump is known as someone who won't back down from a conflict. Some would argue he enjoys conflict. He has suggested blasting Iranians out of the water, making Mexico pay for our border wall, and responded to North Korea with a threat of "Fire and Fury" that the world has never seen. Will the fight fire with fire tactic work - or will it lead to an event that shocks the global markets? Also, personnel turnover at the White House has been staggering. Historically, political upheaval has been synonymous with market volatility. So far, the market has been numb to high ranking official resignations or firings, as well as mass disbandment of advisory committees. But will the markets truly continue to believe our high-ranking government officials don't have an eventual impact on our economy and stock prices?

So why hasn't gold shot up in value during Trump's presidency? Some say Bitcoin is stealing Gold's thunder, others say demand is down because equities are making new all-time highs seemingly every week. But on paper, one could argue that Trump should be the biggest boon for gold prices in presidential history. With fiscal and monetary policies leaning solidly dovish and with chest-beating quotes almost daring volatility to spike, traditional store-of-value and safe haven assets may soon come back into vogue. For now, there has been a lack of follow-through on catalysts that could cause sharp spikes in inflation and volatility. However, the forces that be maybe just needed a little more time to shift the market, and gold will truly become a "huuuge" investment opportunity for investors.