Thursday, November 10, 2016
Post-Election Commentary from Sprott
Whether the election went for or against your candidate, one thing we can all agree on is that we’re glad it is finally over!
Going into the election there were many wild predictions for what a Trump presidency might mean for the markets, but judging by yesterday’s 256 point gain in the Dow, it is evident that most of those forecasts are proving to have been nothing more than alarmist arm-waving exercises. The US equity market did NOT fall 20% and gold did NOT spike $100 overnight. In fact, following some initial knee-jerk reactions, things are actually even moving contrary to those prognostications.
We wanted to take this opportunity to share with clients a view from our Toronto based fund managers who run Sprott’s precious metal funds. Leave it to our northern neighbors to offer a level-headed and impartial interpretation of Tuesday night’s results:
Here is our quick summary of what a Trump victory means for precious metals, major points only. Trump’s economic platform centers around fiscal easing via lower corporate tax rates (from 35% down to 15%, according to campaign policies). Spending will also increase as infrastructure stimulus will be launched most likely on a massive scale. This reduction in tax revenues and increased stimulus spending will be paid for by issuing much more debt (think trillions of dollars over the next several years). This will be highly inflationary but gov’ts also cannot let yields rise to the point where it slows or damages the economy. We have mentioned in our prior weekly commentaries that the BoJ policy of capping 10 year yields will be very gold bullish. With Japan, the US, and very likely Europe now intent on spending massive amounts on infrastructure (ie. fiscal spending as oppose to monetary policy), the need to cap yields (like the BoJ) has increased in our minds. We expect real yields (the key driver of gold price) to head lower as inflation expectations outpace the rise in nominal rates. We also see the USD weakening from current levels as the market prices in the Trump victory. Volatility will also rise. These are the key drivers of gold: lower real rates, weaker USD (really its stronger Yen), and rising volatility.
From a trade perspective, gold bullion will likely settle with a low trade range around $1280 to $1300 in the short term. $1308 is an important resistance level to watch, breaking through that we can target the $1340/50 level short term. The low of $1250 we viewed as excessive and this level will become the long term support level. The low on GDX of $22.50 will also likely become the key support level. The overhead key resistance level on GDX is $25.90, a breakout will target $28. With the Trump victory, it is likely we put this recent bull market correction behind us. The only possible headwind remains the Dec 14th FOMC. As we head into 2017 the rising levels of debt and Trump policy risk will increase. The need to have some tail risk protection has increased.
With the White House and Congress now in Republican hands (and more likely than not an eventual conservative Supreme Court majority too) we may soon see an end to the past several years of gridlock in Washington. Some of the legislative measures that Trump has indicated he will pursue include corporate tax reform, fiscal stimulus measures for infrastructure, reducing regulations and repealing some of the Affordable Care Act (Obamacare) that has been responsible for rising health care costs as of late. Details, however, have not been Trump’s forte during the campaign season so it’s really too soon to tell what the implications might be. That was, in part, a large reason for why everyone assumed gold would rocket higher – precious metals tend to do well in times of uncertainty.
One idea that Trump floated is a one-time tax of 10% on previously untaxed foreign profits. There is well over $1T of capital parked offshore that US corporates (wisely) refuse to repatriate because they don’t want to pay US corporate taxes on that capital. Assuming some stipulations on the repatriated funds (for example, cannot be used for stock buy-back programs) this could be a wonderful boost to fuel US corporation’s domestic operations for years to come.
Trump favors term limits for Congress, smaller government and less FED interference in the economy – all points we think our intelligent readers can get behind. That notwithstanding, talk is cheapest on the campaign trail and only time will tell if Trump’s policies are able to deliver meaningful (and sustainable) improvements to get global economies growing again.
In light of these potentially important policy shifts, we encourage investors to exercise caution when making any major changes to their portfolio at this time.
If you have questions or comments about this article, please contact your Sprott financial advisor or the author of this article, Eric Angeli, at [email protected]
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