Overview - New Landscape
The markets have been volatile in the few days since Trump has been elected, as major participants rearrange their portfolios to reflect the future change in American economic policies. Reflation, or renewal of growth in real terms, is the major theme that is projected by the new administration. The expectation of higher government spending, lower taxes, and less regulations should lead to an improved investment environment for business capital spending.
Reversal Of The Fear Trade
Also now that the new election results are known, the unwinding of the trades that were used to hedge uncertainty is occurring at a rapid rate. One of the largest of these hedges was the purchase of gold by the people who truly feared a global meltdown. The reversal of these hedges due to the strong rally in stocks has put short-term pressure on precious metal prices. This is a short-term phenomenon that will be over soon as the readjustment settles out.
Growth Is Good For Gold
While the market is currently unwinding precious metals as the fear trade subsides, the longer-term outlook for gold (GLD) is excellent. With a renewal of growth in the economy should come the acceleration of money growth and a pick up of inflation. This is very good for gold and related gold stocks (GDX). Due to the large amount of assets dormant on bank balance sheets, with reflation comes inflation as that money gets put to use. Demand for money should pick up and that increases the velocity of money, thus enabling the onset of inflation.
Weak Latin America Currencies
One of the added benefits to some gold miners is the drop in Latin American currencies due to the perception that Trump will engage in trade wars. As the currencies drop in these countries, the costs to
