The Connection Between Trump and Gold

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(WN.com) Something lots of gold investors might have on their mind is why every time Trump speaks (or Tweets) gold prices fluctuate? Let’s clear up two things: first, gold is a non-productive commodity whose price is driven almost entirely by speculation. Second, twitter has no inherent effect on the price of gold or any other metal. In fact, that second point is the point. People are putting so much weight on what President-elect Trump says that any casual remark is driving expectations. What is the connection between trump and gold?

The Price of Gold and Trump are connected. Why?

Look at the below graph, taken from the World Gold Council.

Five Year Price of Gold Graph

As you can see, around the end of 2016, gold prices bottomed out. A common explanation is that this has to do with major political events. In The Economics of Gold, Peter J. N. Sinclair explains that gold price fluctuations are largely explained in terms of changes in expectations regarding inflation.

How, then, might politics fit in?

The Fundamentals are relatively simple. In Sinclair’s article, above, he listed how expectations of inflation were a key driver for higher prices of gold. Inflation happens to be driven by a number of factors. None of these, traditionally, has been the upcoming comamnder-in-chief.

Why are other hedges against inflation, notably US Government Bond and Real Estate, not reacting quite the same way? First, Eugene F. Fama and G. William Schwert suggested that of these only Real Estate protected against real (as opposed to nominal) inflation. We can infer that T-Bills are unlikely to be purchased if expectations of real inflation were high. Second, Real Estate is arguably far too illiquid to fluctuate so quickly. Thus, gold fits right in as a slightly speculative and highly liquid hedge.

Now we can take a step backwards and ask whether inflation is really the issue? Remember, we are talking about gold and Trump, not gold and Yellen. Unlike the Federal Reserve, the president of the United States does not have the power to directly move overnight rates. In fact, that power is explicitly held by the much more impartial Fed.

An Indirect Tie Between Gold and Trump?

Where, then, does the connection lie? The first question that may come to mind is whether Trump has even said anything about gold. The answer is no, at least not to date. The second question, then, is whether gold prices are influenced by other things he has said? If so, how? Yes, they are. The answer to “how” is simple: trade.

T-r-a-d-e. That five letter word lies at the heart of the connection between gold and trump. When Trump was first elected in November, many people focused on his “pro-business” attitude. This led to significant stock market gains all across. Have a look at the advances in the S&P 500 stock market index for the last six months, below.

S&P 500 Over Last 6 Months

It also led to a period of decline for gold. The spot price of gold hit a low of USD 1,131.35 on December 26th, Christmas Day. Since then, gold has been recovering.

What changed? As people came to see Trump himself, and major appointments such as Wilbur Ross, Jr. as Secretary of Commerce, a challenge showed up. That challenge is protectionism. Barry Eichengreen and Douglas A. Irwin outline how the “interwar” monetary systems in most countries could not survive on the gold standard. Most people, and especially Keynesian economists would agree that getting rid of the gold standard was necessary at that point. Today many people look warmly back to the glory says of US Steel and wonder… Andrew Carnegie’s steel industry, among many others, reaped the benefits of protectionist US policies under presidents like Roosevelt.

Protectionism is the connection between gold and Trump

Protectionism, for those who don’t recall, is the holding back of trade between nations in the interest of fostering equitable competition and supporting domestic industry. These are laudable goals, and many are shared by the recently resurgent anti-globalization movement. The gyrations of gold with Trump are tied to Trump’s protectionist remarks. We can conclude that since protectionism is very likely to lead to a decline in equity markets and generally less trade, gold is seen as an appropriate bet.

 

 

 

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