John Hathaway: What does Trump’s victory mean for gold?
Dear Friend of GATA and Gold:
In his latest market letter, Tocqueville Gold Fund manager John Hathaway notes that the smashing of gold after the U.S. presidential election involved the dumping of futures contracts nominally equivalent to two years of production.
“We have observed on repeated occasions,” Hathaway writes, “that purely speculative paper transactions distort the price of real-world physical goods. In our view, price-disruptive distortions of this sort (including commodities other than gold) are enabled and encouraged by the willingness of the Chicago Mercantile Exchange to promote high-frequency trading to build profitability.”
That seems to be as close as any respectable participant in the financial markets can get to the issue of manipulation of the gold market.
Hathaway notes that the systemic risks to the world’s economy have not vanished with the election and argues that “exposure” to gold “may make more sense than ever.” His letter is headlined “Trump’s Victory: What Does it Mean for Gold?”
In our view, the systemic risks that existed prior to the presidential election have not suddenly vanished. Most important among these is a massive bond-market bubble. Close behind, equity valuations remain at historically extreme levels. How the new administration deals with these vexing issues, assuming that it even begins to comprehend them, is a complete unknown. Any unwinding promises to be precarious, full of pitfalls and setbacks, all of which are reason enough to hedge bets on a trouble-free return to robust economic growth with exposure to gold and precious-metals equities.
Reasons for post-election optimism abound. We agree with the following assessment by MacroMavens (11/17/16):
The vicious cycle of low rates – forcing households to save twice as hard, further depressing growth and inflation, pushing interest rates lower still and making saving even more urgent – will finally be broken. Rather than ping-ponging from one asset bubble to the next, papering over the deep wounds in between with more and more debt, we will finally get back to genuine economic growth built on entrepreneurial spirit and a rising standard of living for the populace. Velocity of money will at last lift off the mat.
To us, the key word in the above quote is “finally.” Getting from point A to point B could prove extremely challenging and time-consuming. Gratification of market expectations seems unlikely to be instant.
Markets have responded to the Trump victory in several ways that seem contradictory. Base metals and the dollar index are on a tear (inflationary expectations), while gold and oil have been weak (deflationary). A very strong dollar is deflationary, as are weak emerging-market currencies. According to Jonathan Lewis of Fiera Capital, “The strong dollar is destabilizing for markets, for foreign assets, for emerging market nations that pay back their debt in dollars…” (WSJ, “Dollar’s Rapid Gain Triggers Angst in Emerging Markets,” Nov. 19)
And according to David Rosenberg of Gluskin Sheff, “There is no bid in the Treasury market and the price chart looks like Bank stocks in the summer and fall of 2008. Globally, we have seen (post-election) $1.2 trillion of bond value wiped out.” Bonds are weak based on expectations of rising deficit spending and inflation. Higher bond yields would seem to undermine the idea of higher stock prices, especially with valuations near all- time highs, perhaps second only to levels seen during the dot-com bubble.