The dollar is headed down soon, if Steven Mnuchin has his way.
In January, U.S. Treasury Secretary nominee Steven Mnuchin said publicly that an excessively strong dollar could wreak havoc on our economy. The comments were so strong that the dollar dropped to its weakest level in more than six weeks. President Trump has also argued that the U.S. dollar is too strong, reversing the U.S.’s longstanding tradition to support a strong-dollar policy.
Back in January, this was mere speculation. Now that Mnuchin has been officially confirmed, we can expect his arguments to find their way into monetary policy soon. A lower dollar could make goods and services in the U.S. much more competitive against other countries and help restore the manufacturing jobs President Trump has promised.
It would also be great for gold and silver.
Gold prices are already up about 6 percent in 2017, through a combination of steadily growing investor demand and mounting fears about the paper markets at nosebleed levels.
There are four factors that will continue to support gold prices in the coming months:
The U.S. dollar is likely to weaken. If Trump wants to bring back manufacturing jobs to the U.S., he will need the dollar to weaken.
The “Trump Rally” will eventually succumb to mean reversion. The markets have been anticipating that Trump’s pro-growth, anti-regulation agenda will cause global corporate profits to rise. But these policies will clearly take time and face stiff political opposition along the way. Gold stands to benefit as the new president’s plans hit speed bumps, even if he is eventually successful.
Odds of a “Black Swan” event are increasing. Tensions are rising with China, Russia and North Korea, to name just a few countries. Talks of war, walls and bans increase the risks of another 2008 financial crisis or 9/11.
Higher demand from Islamic investors in the gold market. In early December, a new Sharia Gold Standard was approved. This will stimulate demand across Muslim markets like Malaysia, much like India and China have boosted physical gold demand through their own cultural and economic incentives.
MARKETS HAVE REACHED POINT OF “COMPLETE INSANITY”
Former Reagan administration Office of Management and Budget Director David Stockman thinks today’s stock market has reached the point of “complete insanity.” According to Stockman, “The market is apparently pricing in a huge Trump stimulus. But if you just look at the real world out there, the only thing that’s going to happen is a fiscal bloodbath and a White House train wreck like never before in U.S. history.”
Stockman expects Congress to block Trump’s economic agenda, with a debt ceiling vote on March 15 that could quickly bring a financial shutdown to the U.S. Stockman points out that we are already 92 months in this expansion: long past where it should have seen a correction. Moreover, the U.S. continues to have a giant debt and deficit problem and he believes that Trump will never get a debt ceiling increase through the Congress without a government shutdown.
Despite his best intentions, President Trump has inherited thirty years of fiscal disaster created by his predecessors and $10 trillion of debt is built in under current policy.
The resignation of Federal Reserve Governor Daniel Tarulio gives Trump room to reshape the Fed’s policymaking staff and will result in more Fed monetary experiments that will hurt corporate America’s confidence in an independent U.S. monetary policy. Danske Bank analyst Jens Pedersen says gold’s recent strength is based on a weaker dollar and political uncertainty.
Marc Faber warns investors may be in for a year of disappointment and precious metals will prove to be a useful hedge. Chief market strategist for Alexander Capital Scotty George notes that gold is benefiting again from safe-haven demand and argues that the metal could easily move another 30% higher in the short term. According to George, the more uncertainty coming out of Washington, D.C. and globally, the better it is for commodities and tangible assets overall.
VOICES OF CAUTION
Three of the nation’s largest banks have recently issued reports that highlight the growing risks in 2017. Trump’s plans to drop out of trade deals and impose new restrictions on immigration have caused uncertainty to rise and cast doubts on his ability to enact his ambitious agenda.
Goldman Sachs economists point out that President Trump’s ambitious plans for growth are likely to be overcome by the negative effects of restrictions on trade and immigration. Wells Fargo researchers say that the new President’s controversial policies, combined with geopolitical shifts, could impede the progress of global recovery.
A note from Bank of America suggests that the relatively low U.S. unemployment rate will make it difficult for the economy to kick into higher gear. The report also states that the president’s plans for spending on infrastructure may simply lead to higher wage inflation and a stronger dollar, which in turn could make it harder for U.S goods to compete overseas.
DON’T TRUST YOUR WEALTH TO A SINKING SHIP
The world of investing has always been challenging, but the events of recent months underscores that the risks to your paper-based assets are real and growing. A weaker U.S. dollar, $20 trillion in national debt, a bitterly divided U.S. electorate and emboldened enemies abroad make the case for owning gold and silver more compelling than ever before.
When you own physical gold and silver, your wealth is not tied to the whims and fancies of governments or central banks. When the next black swan event happens (and, sadly, it is inevitable), owning precious metals will smooth out the short-term turbulence and chaos that always follows.
