The Fed finally raised its target interest rate and issued guidance for 2017. Trump shocked the political world and stocks seem to be making new highs daily. Investor sentiment is at two-year highs, fueled by optimism for renewed economic growth, de-regulation, and tax cuts.
Meanwhile, the mood is decidedly negative toward gold.
Mainstream media sites like Barron’s and The Financial Times are claiming the end of the recent bull run in gold and have a very bleak outlook.
Gold is struggling. The election was supposed to increase market volatility and push investors to safe assets. Volatility has risen, but investor sentiment has shifted toward hopes of better economic growth through fiscal stimulus, tax breaks, and infrastructure investing.
With one of Trump’s central economic themes being the need to increase infrastructure investment, industrial metals and the stock market in general have fared better. In contrast, gold is this year’s worst-performing metal.
Modestly stronger US economic expansion and the potential for a rise in inflation propelled by Trump’s spending plans already are setting the tone for more Federal Reserve rate hikes next year. Translation: more downward pressure on gold prices.
With gold bordering on bear market territory—down nearly 20% from its peak earlier this year—now is the time to make a precious metal investment.
As hard as it may be, if you’re a long-term investor seeking additional portfolio insurance or capital preservation, you now have the opportunity to buy what very few other investors want.
A Missed Opportunity
Investors watched and listened closely all year to Janet Yellen and other Fed representatives pontificate about the economy, monetary policy, and the direction of interest rates. After forecasting as many as four interest rate hikes in 2016, we wound up with one. In the process, gold went from $1,050/oz. to well over $1,300/oz.
Investors who waited patiently for sub-$1,000 gold prices were left at the proverbial station as the gold train took off. As gold performed strongly in the first half of 2016, many potential buyers kicked themselves for not taking a position earlier.
The Turning of the Tide
Gold looked poised to move even higher on election night as Trump’s victory became more certain, but markets quickly reversed course and investors are bidding US stocks to record levels. The market’s reaction to Trump’s election hasn’t been seen since Ronald Regan’s defeat of Jimmy Carter in 1980.
The Dow Jones Industrial average is up over 15% and small cap US stocks, represented by the Russell 2000, are up over 22% year to date, with the bulk of the move coming recently. US financials, represented by the ETF XLK, has risen 23% since the election, and the US dollar vs. a basket of other major currencies is the strongest since 2002.
Meanwhile, safe-haven assets such as treasuries have fallen out of favor, experiencing sharp declines. The 10-year US treasury yield has surged 40% since November 1 and gold has declined nearly 15%.
History doesn’t repeat itself but it often rhymes.
Forecasting the Future
If you think the Fed will raise rates three times in 2017—and the new administration will smoothly usher in changes to boost economic output and corporate investment—then perhaps increasing or maintaining significant exposure to stocks is the right strategy.
Stock investors are currently pricing in a very orderly implementation of tax cuts, deregulation, infrastructure spending, and more advantageous trade deals by the new administration.
But if you think there’s a chance of rising volatility, heightened geopolitical risks, or a myriad of other risks such as sovereign bond default by a member of the European Union or an emerging market country, then adding to or initiating a precious metal investment is warranted.
And while it appears Janet Yellen’s position as Chairwoman of the Federal Reserve is safe through February 2018, I would not bet against her resignation or possible early removal if Fed actions are not conducive to the new administration’s agenda.
Strike While the Iron is Hot
The mainstream media may be bullish on US stocks right now, but the US is entering a very uncertain period. With the stock market in its second longest bull market ever, investors should position themselves accordingly.
If you wanted to buy gold late last year, but didn’t because you thought prices would move lower, this is your second chance—but it won’t last forever.
Gold has corrected 20% over the past few months, and 2017 could be a replay of 2016—where the Fed postpones rate hikes amid tepid economic growth and turmoil in other parts of the world—putting gold back in favor.