by Michael J. Kosares
IMPORTANT POST FOR LONG-TERM PORTFOLIO PLANNING
“Douglas Borthwick, managing director of Chapdelaine Foreign Exchange, argued in a note earlier this month that an incoming Trump administration, by throwing out the strong dollar policy, could use the currency as a linchpin in implementing its economic agenda: ‘With a removal of the Strong USD Policy, the US Dollar will weaken against its global counterparts. This will give the FED the ability to normalize US interest rates, as they can use the weaker USD and the resulting inflation as an excuse for raising rates. . .'”
MK note: We have come to an interesting crossroads for the gold market. Yesterday, vice-president elect Pence told Fox News that we now have a president who understands business and that a strong dollar hurts our exports. He made the inference that Trump would likely comment on the dollar regularly as president, something past presidents traditionally have shied away from doing.
Markets, as most of us know, move on sentiment as much as they do hard realities. Thus someone the stature of the U.S. president talking down the dollar is very important to market psychology – not just for gold but all markets. The Trump administration’s position has already had an effect on the gold market. Though gold has reacted rather modestly to Janet Yellen’s announcement two days ago of more interest rate hikes this year, it is nothing when compared to the waterfall drops following past announcements on the subject of higher rates.
Things have changed. . . . . .
MK note 2: As for the Fed using weak dollar sentiment as cover to boost rates, such increases are likely to stay behind the inflation curve. The quickest way to undermine, and in fact eliminate, a weak dollar policy would be to put rates high enough to create a positive real rate of return on dollar-based financial instruments. Real interest rates is what real money managers watch in terms of positioning their clients’ portfolios. I think, too, the Fed understands that such a policy would undermine the Trump administration’s economic program. The fact of the matter is that it would also undermine the Fed’s attempt to “normalize” interest rates.
Below are charts covering the historical real rate of return on gold and the dollar. With respect to the real of return, gold has done spectacularly well over the past decade and a half and probably a key reason why gold investment demand has continued to grow over the past several years despite the lower price.
Now the question becomes:
Has the Trump administration inadvertently conferred its blessing on the gold market?
Chart note: The extensions in the financial instruments’ bars above the CPI represent a positive real rate of return. When the CPI extends above the financial instrument, it represents a negative real rate of return. As you can see, at times gold’s real rate of return has been spectacular, as mentioned in the text above.
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