The ongoing portfolio readjustment continues following a surprise Trump victory, one of the casualties of the latest market turbulence has been the yellow metal, falling over $100 US from a high of $1338.3 to the $1220 range. Periods of volatility like these provide an excellent opportunity to add position in anything that has exposure to precious metals, as the reasons for owning gold have increased significantly.

Trump’s Victory

Trump’s aggressive deficit spending policies, coupled with his volatile nature unnerved markets. But his victory speech, soothed markets.

I will leave you with a few key quotes:

"Hillary has worked very long and very hard and we owe her a major debt of gratitude for her service to our country, I mean that very sincerely"

"It is time for us to come together as one united people"

"We will deal fairly with everyone, all people and all other nations. We will seek common ground, not hostility. Partnership, not conflict."

Market Reaction

Equities which had sold off ~4% into the night, rebounded and by the close of November 9th were up ~ 1%. The bigger story was in the credit market with 10 year yields rising almost 50bps from the lows of the Trump sell-off. While TIPS implied break-even inflation rate rose only about ~30 bps . The increase in the real yield sent gold lower. In essence the markets are trying to front run the inflation they expect from a Trump presidency and it seems that they are overshooting expectations, as concrete policy will take time to materialize.

Gold & Real Yields

Trump’s Vision: Nominal Yields, Real Yields and Inflation

In the meantime here are a few points to keep in mind:

  1. Higher yields today, before any stimulus is flowing into the economy are deflationary and will impact growth and valuations by reducing the discount rate and raising borrowing costs.
  2. As I will present in an upcoming article, the US national debt is becoming more and more untenable, and rising yields coupled with a rising deficit will lead to a quicker systemic instability of the US debt and currency markets. Significantly higher yields will dampen any hope of growth, as leveraged businesses and consumers are unable to refinance.
  3. The only solution to this issue is for the Fed to monetize the debt by purchasing the longer dated bonds, (Trump spoke of locking in low 30-year yields to finance infrastructure projects), which will artificially cap nominal yields, while real rates fall, becoming negative due to higher inflation. On the surface this would seem unlikely as the Fed is supposed to be independent, but keep in mind Janet Yellen’s term as Fed chair expires in early 2018, leaving Trump with room to appoint a politically friendly Republican nominee. Otherwise, Trump will be unable to do neither his tax cuts or deficit spending programs without catastrophe, which would reduce both nominal and real yields. As seen in the chart above a ~80 bps decline for real yields resulted in a $300 USD increase in the gold price.
  4. Forgetting the Trump presidency, inflation pressures are still rising.
    1. Take a look at CPI Ex-Energy, PCE Core Inflation, both of which has continued to rise as this year noticeably this year.
    2. While OPEC and higher oil prices may be an unknown, gasoline prices have stabilized above $2/gallon, a likely bottom and will continue to rise yearly, even in a relatively bearish scenario for oil.
    3. Wage growth as shown in the Non Farm Payrolls has accelerated, signaling a tightening labour market. The movement for a higher minimum wage and a crack down on illegal immigration/labour will only push this metric higher

CPI Ex Energy & PCE Inflation

NFP Hourly Wage Growth

 

The current sell-off in gold is a rare opportunity and should be bought aggressively.