Donald Trump’s Next Move Could Send Gold Prices Rocketing
It’s been less than a month since President Donald Trump took control of the Oval Office, and the world is nervous. Mainly because he’s a political outsider and no-one really knows what his political strategy is. But they have a good idea. In his first week in office, Donald Trump signed a large number of executive orders, showing America and the world that he plans to keep his campaign promises.
One thing is certain, Trump’s campaign promises will all have consequences. Some will be positive. Others, however, will be trigger events that resonate around the world, and could send gold soaring to $5,000 per ounce and silver to $50.00 per ounce.
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You won’t hear this from the mainstream media though. Not because it isn’t true, but because it isn’t what investors want to hear. Keep in mind too, that the mainstream media doesn’t have what you would call an excellent track record with making accurate calls. Recall, if you will, that all of the so-called major polls said Trump was going to lose the U.S. election in a landslide.
On the outside chance that Donald Trump did manage to win the election, Wall Street warned that a Trump victory would lead to a 10% to 50% plunge in the S&P 500. They predicted that a Hillary Clinton victory, on the other hand, would lead to a slight two-to-three percent bump.
As for gold prices, the predictions were that, should Trump squeak out a win, gold prices would hit $1,500 per ounce. That would represent an 18% gain from where gold was immediately before the election. If Clinton were to win, gold prices would remain pretty flat.
Neither happened. Gold tanked and stocks soared. After the election, stocks were on a tear, with the S&P 500 advancing six percent by the end of December 2016. In the leadup to the election, the S&P 500 had advanced just 2.2% year-to-date. Today, the S&P 500 is in record territory and up almost nine percent since early November.
What about gold? Gold had been bullish in the first half of 2016 on fears of global economic uncertainty. That momentum came to a crashing halt after Trump won the election. By the end of 2016, gold prices had fallen around nine percent. Why? Investors decided they actually preferred Trump’s economic vision over Clinton’s. Trump’s economic policy would lead to a wave of economic growth and be good for corporate America, after all.
What is the mainstream media telling investors now about gold? Not surprisingly, the major news outlets have been telling investors to shun precious metals like gold and silver. Why hedge against economic uncertainty when stocks are at record levels, investor optimism is soaring, consumer confidence is rising, and Wall Street is euphoric.
But again, they’re wrong.
We’ve all seen how President Trump’s tweets can impact a stock’s share price. Imagine now how official announcements or actions could cause a trigger event that would send gold and silver prices soaring.
Trump’s “America First” policy” has caused some to fear a trade war with China. His infrastructure spending and tax cuts could send U.S. debt levels spiraling out of control. He has questioned alliances with the North Atlantic Treaty Organization (NATO) and has argued for expanding U.S. nuclear arms. There is also ongoing tension between the U.S., China, North Korea, and Iran.
It’s not difficult to see that there are a huge number of trigger events that could easily send gold prices to $5,000.00 per ounce.
Going Nuclear with National Security
President Donald Trump wants to change America’s nuclear policy. Doing so could destabilize the entire world. Again, we’re less than a month into Trump’s presidency; anything can happen.
On the campaign trail, the global security landscape darkened as Donald Trump made comments about using nuclear weapons and increasing the country’s nuclear arsenal. In 2016, well before the November election, Donald Trump asked a foreign policy expert three times why the U.S. can’t use nuclear weapons.
In April 2016, Donald Trump, who was then just the Republican presidential front-runner, said he will not rule out using nuclear weapons against ISIS in Iraq and Syria. “I don’t want to rule out anything.” “I will not be a happy trigger like some people might be, but I will never, ever rule it out.” (Source: “Trump targets ‘single greatest problem’ in world — and ‘it’s not global warming’,” The Washington Times, April 28, 2016.)
In December 2016, then-President-elect Donald Trump heightened national security concerns when he renewed calls for an arms race on his “Twitter” feed and in a TV interview. On Twitter, Trump wrote, “The United States must greatly strengthen and expand its nuclear capability until such time as the world comes to its senses regarding nukes.” (Source: “Twitter Post,” @realDonaldTrump, December 22, 2016.)
In an interview with MSNBC, Donald Trump said, “Let it be an arms race,” followed by, “We will outmatch them at every pass and outlast them all.” (Source: “‘Let it be an arms race’: Donald Trump appears to double down on nuclear expansion,” The Guardian, December 24, 2016.)
Now, granted, the odds of President Trump starting a nuclear war is as remote as it would be under any president (I recall fears of World War III when Ronald Reagan became president). After all, the U.S. holds fast to the principle of “no first use” of nuclear weapons. But how many politically unstable countries can say the same thing?
Trump might be a nuclear weapon blowhard, but he’s not going to whip out the nuclear codes and start typing. But he could whip other bellicose nations with a nuclear arsenal into an irrational frenzy.
The U.S. is also part of the Treaty on the Non-Proliferation of Nuclear Weapons, an international agreement designed to prevent the spread of nuclear weapons and promote the use of peaceful uses of nuclear energy.
A lot of dubious nations are not on board though. North Korea withdrew, while India, Israel, Pakistan, and South Sudan did not sign the treaty. And one has to wonder how religious the convictions are for some of those nations that did sign the treaty.
I enter as evidence:
Iran has vowed to start WWIII and destroy Israel if President Trump voids the nuclear deal negotiated by President Barack Obama and five other nations (Russia, China, the U.K., France, and Germany) in 2015, in which Iran curtailed its nuclear program in exchange for lifting economic sanctions. Not surprisingly, Iran has violated the deal at least twice since 2015.
While President Trump and many Republicans have said they don’t care about Iran and it’s integration into the global economy, that doesn’t mean Iran is going to sit idly by if Trump dismantles the nuclear deal. Neither will Russia, which was a key player in negotiating the nuclear deal with Iran. Ripping the Iran nuclear deal up would only exacerbate relations between the U.S. and Russia.
Even a non-nuclear confrontation between the U.S. and Russia in Eastern Europe could throw the world into a state of war, triggering WWIII. Trump may not like NATO, but allies around the world would take sides. Russia may not have many friends, but those that they have are powerful.
Saying anything recklessly, whether on Twitter or TV, could also lead to war. North Korea’s Kim Jong-un has said he would use nuclear weapons early in a conflict. “No first use” is not in his vocabulary.
To say the world is inching closer to war than at any other point in the last 25 years would not be a stretch. A modern-day “Cuba Missile Crisis” is not out of the question over the next four years. Neither is gold at $5,000 per ounce.
A Trade War with China and Mexico
Nuclear war is not the first weapon of choice in President Trump’s arsenal; a trade war is, although the impact on silver and gold prices could be just as massive. On his first full day as president, Donald Trump said, “we are going to be imposing a very major border tax on the product when it comes in, which I think is fair.”
A trade war with China is another trigger that could set silver and gold prices soaring. President Trump’s protectionist policies could easily set off a trade war with the world’s second-largest economy. And it would hurt both the U.S. and China.
Trump has said he has no problem raising tariffs against China and Mexico if it helps save American jobs. In the near term, it will be easier for Trump to go after China. To place tariff’s against Mexico, he will need to rip up the North American Free Trade Agreement (NAFTA) first.
A trade war with China though would be complicated and could hurt corporate America, hit stocks, and kill investor—and consumer—confidence.
For every dollar that the U.S. exports to China, it imports more than four dollars into the United States. In fact, 20% of everything that the U.S. imports comes from China. This has kept prices low for American consumers.
Trump has blasted the trade imbalance, and anger among American workers helped usher Trump into the White House. First, Trump is a businessman, and he looks at the trade imbalance through this lens. He has described trade relationships as a binary arrangement, with one winner and one winner. And in this trade relationship, the U.S. is the loser.
What Trump does next with China is critical. Experts say that corporate America and American workers have the most to lose if China retaliates with its own tariffs.
If Donald Trump imposes a 10% tariff against China, exports to the U.S. could fall by as much as 25%. Should Beijing retaliate, U.S. economic growth could slow by a quarter percentage point. In 2016, the U.S. economy grew just 1.6% in 2016. (Source: “Goldman Sachs claims Donald Trump trade war would hurt US and Chinese economic growth,” The Independent, February 8, 2017.)
To test the waters, President Trump could take a run at China’s currency policy and impose tariffs on those products that face heavy competition from Chinese imports, including large appliances, machinery, steel, and auto parts.
China could retaliate by raising its own tariffs. It could also fix the yuan even weaker against the U.S. dollar or create its own trade deals with other economies closer to home. No matter what China implements, it will hurt the U.S. economy.
Some believe that Donald Trump is just using the threats of tariffs as a bargaining tool, but it’s been on his radar for years. And, as we have seen, he’s keen on keeping his election promises.
Does President Trump have the power to impose tariffs? Yes he does. Under the Trade Act of 1974, the president can impose tariffs and quotas on countries that he believes violate trade agreements or engage in unfair trade practices. Manipulating a currency would certainly fall under that category. (Source: “Public Law 93-716,” U.S. Government Publishing Office, last accessed February 10, 2017.)
One section of that legislation allows the president to impose temporary import surcharges of up to 15% for up to 150 days. In 2009, President Obama used the Trade Act of 1974 against China on tire imports.
The International Emergency Economic Powers Act of 1977 gives the president the authority to use tariffs on a country during a “national emergency.” The definition of an emergency is vague. Losing jobs to China and Mexico could be one interpretation. The fact is, Donald Trump has a lot of leverage when it comes to imposing tariffs. (Source: “50 U.S. Code § 1702 – Presidential authorities,” Cornell University Law School, last accessed February 10, 2017.)
A massive trade war would be a major trigger event that could seriously undermine corporate America and erode investors and consumer confidence. As a result, investors would seek shelter in safe-haven investments like gold and silver.
President Trump’s War on Taxes
President Trump’s war on taxes helped him win the election. Lower taxes and regulations were going to put more money into the pocket of everyday Americans and make corporate America more profitable. It’s win-win.
Donald Trump recently announced he has a “phenomenal” tax plan ready to unveil in the next two to three weeks. One that will “be phenomenal in terms of tax and developing our aviation infrastructure.”
The White House has said Trump will announce the “most ambitious tax reform plan since the Reagan era.” This sent stock prices and the dollar higher as investors hope this will translate into a cut in corporate tax rates. It also sent silver and gold prices lower.
As a hedge, gold reacts poorly to a strong dollar. Rising stocks also do not favor safe-haven assets like gold and silver.
What do we know about Trump’s proposed tax plan? Nothing. While President Trump vows a “phenomenal” tax announcement, he offered no details. But, if Trump’s proposed tax reforms are going to be the most aggressive since the 1980s, it might be a good idea to see what President Reagan thought about tax reform:
The more government takes in taxes, the less incentive people have to work. What coal miner or assembly-line worker jumps at the offer of overtime when he knows Uncle Sam is going to take sixty percent or more of his extra pay? Any system that penalizes success and accomplishment is wrong. Any system that discourages work, discourages productivity, discourages economic progress, is wrong.
If, on the other hand, you reduce tax rates and allow people to spend or save more of what they earn, they’ll become more industrious; they’ll have more incentive to work hard, and money they earn will add fuel to the great economic machine that energizes our national progress. The result: more prosperity for all–and more revenue for government.
(Source: Reagan, Ronald, An American Life, New York: Simon & Shuster, 1990.)
Amen.
Typically, it’s a good idea to under-promise and over-deliver. But if you say that something is going to be “phenomenal” and the “most ambitious tax reform since the Reagan era,” you really need to over-deliver.
The markets have been in a holding pattern lately because investors are taking a wait-and-see-approach to Trump’s presidency and his economic policies. If they don’t live up to expectations and Americans don’t end up with more money in their pockets—and if corporate profits aren’t really, really good—stocks could tumble.
And stocks are at lofty valuations. According to the Case Shiller cyclically adjusted price-to-earnings (CAPE) Ratio, the S&P 500 is overvalued by almost 80%. The ratio has only been higher, longer, twice: in 1929 and 1999. Each time it was followed by a crash.
All of this has boosted the appetite for safe-haven assets like gold. The same thing could happen again. This time though, gold and silver prices would soar considerably higher. Stocks would crash, the U.S. and global economy remains fragile, and the outlook is dim. That’s because the former administration was caught flat-footed on foreign policy, and there is, for the time being, no one superpower in the free world to lead the way to growth.
President Trump’s tax reforms could also have long-lasting implications on the U.S. economy that could be felt for decades. This is the kind of trigger effect that could benefit gold and silver prices for years to come.
In particular, I’m talking about the costs of Donald Trump’s proposed tax-cutting and $1.0-trillion infrastructure spending plans. While Trump’s plan will certainly create jobs, it will also significantly increase the national debt, which currently stands at an eye-watering $20.0 trillion.
According to the Congressional Budget Office (CBO), President Obama left President Trump with a national debt over $19.0 trillion, a 2017 deficit of $559.0 billion, and anemic economy. On its current trajectory, the public debt will climb by another $10.0 trillion over the next 10 years. With Trump’s tax cutting and spending plans, the national debt will climb by an additional $6.0 trillion over the next decade. (Source: The Budget and Economic Outlook: 2017 to 2027, Congressional Budget Office, January 24, 2017.)
By 2027, U.S. gross debt will soar from $20.0 trillion to $30.0 trillion, and debt held by the public could rise from $14.0 trillion to almost $25.0 trillion.
Donald Trump’s war on taxes is well intended, but the tax reforms, if not supported by sustained, strong fundamentals, will be a short-term fix that American taxpayers will be on the hook for … for generations.
Rising national debt levels, in the midst of a trade war with China or Mexico, coupled with rising interest rates, could very well send consumer confidence levels lower, and investors seeking the comfort of gold.
