Posted by on November 18, 2016 9:10 pm
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Categories: 8.5% Borrowing Costs Bullion Business Currency donald trump Economy Exchange-traded fund gold Inflation Matter Political economy Precious Metals Real estate Stagflation Trump Administration unemployment United States dollar

Gold ETF Holdings have collapsed by 1.93 million troy ounces in the days since Donald Trump’s election. This is the biggest decline since July 2013, a period when gold prices plunged to $1200 before ripping almost 20% higher in the next few weeks.

Bloomberg reports that traders have raised bets on higher borrowing costs following President-elect Donald Trump’s pledge to boost spending and as U.S. data pointed to an improving economy. That helped send a gauge of the dollar to a nine-month high.

Investors sold 30.5 metric tons of gold from bullion-backed funds so far this week, the most in three years.

“It’s all about the dollar,” said David Govett, head of precious metals trading at Marex Spectron Group Ltd. in London. “I suspect we’ll see an 11 handle on gold today,” he said, referring to prices dropping below $1,200 an ounce.

Holdings in bullion-backed exchange-traded funds dropped for a sixth day, the longest run this year, data compiled by Bloomberg show. They fell 8.5 tons to 1,940.6 tons as of Thursday, the lowest since July.

But – as the charts below show, the last time ETF holders flushed gold at this rate, marked the bottom at $1200 before a major surge higher…

So while technial analogs signals gold’s excessively sold persepctive, fundamentally-speaking as notes Trump’s agenda stacks the odds in gold’s favor

The Trump administration’s ambitious agenda in the current economic climate has the distinct possibility of triggering inflationary forces, ultimately resulting in stagflation.

Stagflation is a combination of low economic growth in the presence of rising prices and under employment. Necessities like food, fuel, and electricity will increase in cost and assets like real estate and stocks will decline.

While the employment picture has improved since the financial crisis, the quality and types of jobs being added are questionable—as indicated by wage data and labor force participation rate.

Jobs, specifically manufacturing jobs, were a big pillar of Trump’s campaign and will undoubtedly be one of his major initiatives after taking office.

Even if he’s successful in creating jobs, it will take a significant amount of time before the effects have an impact on economic growth and government revenue. And to make this and many of his other plans come to fruition—building a wall on the Mexican border, increasing immigration efforts, and improving infrastructure such as airports and bridges—it will require debt and most likely, higher borrowing costs.

As you can see in the chart above, the US dollar is still viewed as the strongest global currency, and this has become even more pronounced recently. But its strength could prove to be a double-edged sword as exports become more expensive and additional debt service by foreign holders will be difficult as their currencies depreciate.

Recent history shows stagflation buoys gold

During the 1970s period of stagflation, gold experienced a significant rally. In fact, it tripled in price from 1972 to 1974. It tripled again at the end of the decade.

The cause of the coming stagflation may be different this time around, but the result could very well be the same. Gold’s recent correction is an opportunity to get positioned with an initial allocation or make an additional investment—before prices really begin to soar.

Gold is poised to be a major beneficiary of this administration’s agenda and its potentially inflationary agenda.

To put this in perspective, the last period of significant stagflation coincided with gold’s move to $850/oz. in January 1980. Adjusted for inflation, this would equate to $2,500/oz. in current dollars.

With massive uncertainty and abrupt fiscal policy changes likely, now is the time get positioned into physical precious metals.

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