It was supposed to be the end of the gold trade.
Donald Trump had taken the White House. The American economy, a decade in the doldrums after the Great Recession, was on the road to becoming a mighty beast again. The dollar was rallying strongly – so strongly – and the stock market was surging. Bond prices were flagging. And the Federal Reserve was about to launch itself into a rate-hike cycle that would, supposedly, normalize interest rates after nearly a decade in the cellar.
That was December 15, 2016, when gold hit $1,130 an ounce, down from more than $1,300 just days before Trump’s presidential victory.
What can past market crashes teach us about the current one?
And look where we are today: Gold approaching $1,300 again.
The Trump Trade is over. It seems to have blown out as quickly as it blew in.
The market, as it so often does, worked itself into a lather about the good times to come, only to have disappointed itself when the reality of life in Washington, D.C., slammed into the dream.
The U.S. is arguably in a tougher spot today than it was four months ago. Stock prices are excessively high and, at these levels, represent risk more than reward. Corporate profit margins are coming down from unsustainably high levels, calling into question the excessive valuations.
Year-over-year auto sales have been falling for three consecutive months. Retails sales aren’t so great and retail-store closures are on pace to exceed 2008, the height of the Great Recession. Yes, that says more about the power of online retailers to steal sales, but the loss of retail stores leaves a large number of Americans out of work.
Debt today is as bad or worse than it was at the height of the Great Recession. Federal debt is at $20 trillion, more than double its 2007 level. And U.S. consumers now have as much debt as they had at the peak in 2008 – nearly $13 trillion in combined housing and non-housing debt. It’s the non-housing debt (auto loans, credit cards, etc.) that causes us the most worry. It has grown by nearly $1 trillion, 35% higher, in the last decade – a period of time in which wages barely budged and the face of the workforce shifted from middle-class jobs to low-income service-sector jobs.
With High Debt and Economic Questions, Gold Shines
What happens, we wonder, if the Fed really does keep raising interest rates? We imagine all those credit-card balances and home-equity lines of credit and auto leases resetting at higher and higher rates, yanking more and more money out of the economy to service consumer debt, thereby putting any economic growth at risk.
As all of that is happening, the Trump administration has failed in its early, key policy endeavors, most notably revamping Obamacare. That was supposed to save tons of money that could then be used to afford a massive tax-cut plan. Now, the tax cuts are questionable, and the plan itself is already under assault from lawmakers on both sides of the aisle.
The stock market doesn’t seem to care about any of this at the moment. But gold bugs clearly do.
They realize an ill breeze is blowing … and that this breeze could blow up into a much stronger wind as series of crises brew. Trump’s surprise attack on Syria has the world – and some of his staunchest supporters – questioning his motivations. Moving a naval strike force into position near North Korea raises the specter of nuclear retaliation against South Korea or Japan.
We would note, as well, that with all this going on, the chances that the Fed continues to raise interest rates is looking thinner. That’s positive for gold since it takes some of the wind out of the dollar’s sail. The dollar and gold tend to be on opposite sides of the see-saw – when one goes up, the other comes down.
We wrote earlier this week that in a crisis, the yen could be the new safe haven currency (you can read that here). That remains the case. But, gold will always be the ultimate port on a storm. That’s why we maintain some exposure to gold in almost all of our strategic portfolios. It’s a key holding because, at this point in history, it’s financial lifestyle insurance to guard against potential geopolitical, economic, central banking and currency crises – and the world is rife with those potentials today.