A populist movement spreading across the U.S. and Europe has some commodities investors giddy about prices - especially gold, silver and other precious metals.
But will a rosy metals scenario really pan out?
Right now, commodities in general -- and gold, in particular -- are in a downward trend. Gold slid to $1,240/ounce in early March, pushed down by a rise in U.S. bond yields, and by investors more interested in a roaring U.S. stock market.
But gold bugs aren’t giving up easily – they believe the precious metals market has a good friend at 1600 Pennsylvania Ave. in Washington, D.C.
“Donald Trump has made it very clear that he thinks the dollar is too strong and traditionally, we have always seen the U.S. dollar and gold pivot together,” said Jamie Johnson, chief executive officer at FJP Investments in London. “When gold is strong the dollar is weak and vice versa. Eventually, I believe President Trump will ensure the dollar weakens and with that, gold will rise in price.”
That run-up could happen sooner than investors might think, other experts say.
“Gold has a good chance of rising under Trump because gold tends to rise in
the first year of new presidents, especially those with controversial new
spending plans,” noted Michael Fuljenz, president of Universal Coin & Bullion in
Precedent For Gold Rise
At Universal, there’s been an increase in new customers buying gold, Fulijenz said, as well as existing customers buying more gold, since Trump was elected.
Gold rose 22.6 percent in Jimmy Carter’s first year, he added. More recently, gold rose 18 percent in Bill Clinton’s first year and 25 percent in Barack Obama’s first year.
“Trump is as controversial as Carter, Clinton or Obama, so gold could rise strongly his first year,” Fulijenz said.
Gold also will likely rise due to the soaring deficits that will be run up if Trump’s spending plans pass, he said. Initially, gold fell after Trump’s election, since the Republicans also won power in Congress, and most of the governor’s mansions and state legislatures.
“That led traders to believe there would be some tax and regulatory relief, along with some more disciplined spending,” Fulijenz said.
However, that did not turn out to be the case. In his State of the Union speech Feb. 28, Trump proposed the biggest-ever one-year increase in defense spending ($54 billion) and a multi-trillion-dollar new infrastructure plan, along with other new programs.
Other issues, some of them historically based, are in play, too.
“Combined with a coming tax cut and higher interest rates – instituted by the Federal Reserve – federal deficits will start rising again,” Fuljenz explained. “Interest on the $20 trillion public debt may double or triple.”
President Obama also passed several new high-spending programs in this first term, running up deficits of over $1 trillion per year in each year of his first term (2009-12). Those are also years in which gold gained ground the fastest, Fulijenz noted.
Gold trackers do advise investors to take a longer-term view – and a realistic one.
“Gold is rarely about short-term events. It's more about having a hedge in place against any and all forms of calamity,” said Jeff Clark, senior precious metals analyst at GoldSilver.com.
That said, Trump is good for precious metals because of his infrastructure spending plan and the knock-off inflation that is likely, Clark added.
“But once these short-term issues play out, we're still left with unsustainable debt levels, unbalanced budgets by most in the G-20, massive currency dilution, a toppy stock market, a precarious bond market, foreigners dumping Treasuries, and geopolitical conflicts that refuse to resolve,” he said.
Gold is Already Great
Also, there could be a black swan -- an unforeseen event that catches people off guard -- that ends up being the catalyst that pushes people into gold, Clark said.
“This makes most of what Trump might do a short-term catalyst only,” he said. “His policies could lead to long-term inflation, but he has little control over the bigger issues that could ignite the next bull market in precious metals. And it's these reasons that make gold a gold buy right now.”
The way precious metals mavens see it, gold is already great – with or without Mr. Trump.
“Gold has been used and trusted as money from the earliest written records in history,” Fuliojenz said. “Even when nations go off the gold standard, the people can still discipline their government from over-printing currency by owning the ‘golden constant.’”
In that context, interest in gold is just another investment reality on Wall Street -- even if it is underperforming in the early months of the Trump presidency.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]
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