Lack of clarity on fiscal and monetary policy in the United States is expected to prevent gold prices from taking a clear direction during 2017. Gold prices GLD IAU PHYS SGOL GTU have clawed back a large part of the losses that they suffered following the election of Donald Trump through the end of 2016. The markets back then were treating campaign promises made by President Trump and the Fed's forecast for three interest rate hikes in 2017 as foregone conclusions. This is not to say that Trump will not be able to deliver on his campaign promises or that the Fed will not raise interest rates this year, but that the eventual outcomes are likely to be much reduced versions of the promises made by Trump or forecasts made by the Fed.
The passing of any pro-economic growth policies such as infrastructure spending or reduction in regulation is expected to be somewhat negative for gold. In part, this is because this scenario reduces the need for safe haven assets and also because it boosts the likelihood of the Fed raising rates.
It will take some time for policies introduced by the Trump administration to take effect, however, especially since almost all of them promise to overturn the status quo, which means they are likely to face significant hurdles in Congress, within regulatory agencies, and in the courts. These delays are then expected to provide fewer clues to the Fed on how it should move forward. This scenario is supportive of gold prices.
It is likely that over the course of 2017 the markets will position themselves on one or the other scenario stated above, based on what information is becoming available to them at any given time. This is then expected to result in this somewhat sideways movement in gold prices.
The second scenario here is more likely to pan out, which would be more positive for gold prices over the medium to long term.
At the time of writing this report there is still no word on the proposed infrastructure plan, which was one of three factors driving stock prices sharply higher. Of the other two, there has been an executive order to review the Dodd-Frank financial regulatory law and there are talks about overhauling the tax code. All of these plans, as stated before, are likely to face significant difficulty in clearing congress, regulatory agencies, and courts, and will take a long time to become law or active government policy.
Safe haven assets like gold are also expected to be supported by the unconventional method in which Trump has been conducting himself during the first few weeks of taking office. Following Trump's victory speech, there was a widely held view in the financial markets, which had also played an important role in driving down safe haven assets, that president Trump would be different from candidate Trump. There was a renewed sense of this following the President's speech to Congress at the end of February, but many of the actions being witnessed following Trump taking office suggest otherwise. Many of his actions already have strained diplomatic relations around the world, some with very close allies, and there also is some push back on his actions from within the Republican Party. The increased uncertainty and tension on the global political landscape following Trump taking office has also played a role in supporting gold prices.
Virtually every economic plan that Trump has proposed so far is expected to raise inflation. While many of Trump's proposed plans face an uphill climb, some of them are likely to come to fruition. To what degree his plans get implemented will determine the inflationary impact that these plans have. Going forward the lack of clarity on the policies that would be implemented and how fully they are implemented is expected to have the Fed on a wait and see mode.
Furthermore, while the U.S. economy has been on a growth trajectory there still are some areas of concern such as a housing market, which is fairly sensitive to interest rates and wage growth, the latter of which has been a hit and miss over the past few months as new entrants keep making their way into the labor market, keeping it well supplied.
Political developments are important of themselves, but they perhaps are more important in terms of their effects on precious metals prices through their impact on economic trends. The end of U.S. potential participation in the Trans Pacific Partnership will have negative economic consequences for the U.S. economy; the absence of the United States in the TPP will boost economic activity in Canada, Mexico, and China, as well as other participants. Other political actions, such as tariffs on Mexico or European imports, and restrictions on allowing skilled foreigners into the United States, also will bear negative consequences for the U.S. economy.
While the U.S. economy is strong and looks even stronger, it has vulnerabilities that could be exacerbated by these politically triggered reductions in U.S. economic activity, but even modest reductions in growth in some key sectors could tip the economy into recession sooner, rather than later, with important consequences for investors' opinions toward stocks, bonds, and precious metals.
If the Fed raises rates per its forecast at the end of 2016, it could be somewhat negative for gold as real rates rise. However, if due to lack of clarity on both U.S. economic growth and Trump policy implementation, the Fed tightens monetary policy at a slower rate than it has projected, this could result in gold prices rising further from present levels. If effective implementation of Trump policies coincides with a tighter labor market it could raise inflation faster than expected and the Fed might end up behind the curve, which would also be a positive scenario for gold.
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