Will Trump Presidency Support Gold?

It’s official. America has a new President. What does the Trump Presidency mean for the gold market?

Is Trump Bullish For Gold?

On Friday, Donald J. Trump has officially become the 45th President of the United States. Is it bad or good news for the yellow metal? As always, opinions are strongly divided. Optimists argue that the new administration’s policies could start a trade war – Trump’s protectionist steps are considered to be negative for the global economy and positive for gold prices. Moreover, these analysts point out that the new President is likely to make the public debt soar. There is also a high likelihood of a recession, according to them, given the current unusually long expansion and the fact that contractions often occur in the president’s first year in office.

Or Bearish?

Pessimists believe that Trump will spur economic growth by a combination of tax cuts, fiscal stimulus and structural reforms. The accelerated growth will lead to a stronger greenback and higher real interest rates, which would be negative for the price of gold. This is what we have already seen after the US presidential election – the yellow metal went into free fall because of such market expectations. Moreover, this view is supported by the fact that Trump inherited an economy that is expanding at a moderate pace, the unemployment rate is low, while inflation is rising, as we wrote on Thursday. Hence, the current macroeconomic outlook looks rather bearish for gold.

The Inaugural Address

Who is right? Well, gold prices moved modestly higher after the inauguration. Let’s dig into Trump’s inaugural address to find out the possible reason why gold behaved in such a way. The main message of Trump’s short speech was that politicians had prospered at the expense of the ordinary citizens, while the American industry and infrastructure had fallen into decay because of foreign countries. The probably most important part of the speech was as follows:

We’ve made other countries rich while the wealth, strength, and confidence of our country has disappeared over the horizon. One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind. The wealth of our middle class has been ripped from their homes and then redistributed across the entire world. (…) From this moment on, it's going to be America First.

For many people, that statement was a bit disturbing, since American presidents usually acted as leaders of the free world. Thus, Trump’s speech may be a signal of a turn in U.S. foreign and trade policy towards a more isolationist and protectionist stance. Such a shift should support the safe-haven demand for gold. Moreover, the address lacked the economic agenda, which could also disturb investors and support the yellow metal. And there is another, quite funny thing. While everyone expects some fiscal stimulus, Trump’s team is preparing significant budget cuts, according to a report from The Hill. If true, this may undermine the narrative of fiscal stimulus, which could support gold in the short-term (in the long-term, the reduction in public debt may be rather negative for the yellow metal).

Conclusions

The price of the yellow metal increased slightly after the inaugural address, which may signal that the Trump Presidency may be supportive for gold. However, this is what all investors believed for months before the elections. But the post-election reality was rather harsh for the gold bulls. Therefore, investors should be cautious. There is a significant risk that once the new administration provides details of concrete economic policies, the pro-growth sentiment will come back to markets. Gold may take a hit then. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.