I very rarely, if ever, mention Donald Trump. Good investors need to be as rational as possible, and when the name ‘Donald Trump’ pops up in a sentence, rational discourse is not what you’re going to get.
But today, at least to start, I’ll make an exception.
The one thing I like about Trump is that he doesn’t give a hoot about what he is or isn’t meant to do. He says what he thinks and delivers the message via twitter, not behind closed doors.
It’s a refreshing change from the ‘yes men’ who have inhabited The White House for years. The ones who know how the game works…the ones who know they aren’t the real power brokers and know who their masters are.
Trump doesn’t know this. His ignorance — or arrogance, rather — makes him think he is top dog. Because of this, there are a lot of elites across the power spectrum in the US who don’t like him.
Which is exactly what I like about him. He is disrupting a deeply entrenched and corrupt status quo. (Just how much is another question.) That doesn’t mean I ‘like’ Trump. From a purely personal perspective, I find him repugnant. But he is a politician after all, and believe me; there is much, much worse.
With my investor hat on, I try to ignore him as much as possible. Politics creates a lot of noise that is only detrimental to investment returns. And depending on where you sit on the political spectrum, listening to that noise will make you do dumb things.
For example, if you hated the idea of a Trump Presidency, and pulled your money out of the market when he won the White House, you’d be feeling pretty stupid right now. The economic cycle was expansionary anyway…and his big tax cuts only added to the upswing.
Anyway, the point of the Trump introduction today is to bring up his meddling tweet from Friday. Which one, you ask? The one having a go at the Federal Reserve, for, well, doing its job. As the Wall Street Journal reports:
‘In a presidency that has seen almost every institution from the FBI to the Supreme Court consumed by division and controversy, the Federal Reserve is a shining exception. President Donald Trump’s nominees are widely seen as competent, careful and apolitical.
‘Mr. Trump’s lengthy riff on interest rates Thursday risks tainting that. In an interview with CNBC he declared himself unhappy that Fed Chairman Jerome Powell keeps raising rates. If not an actual violation of Fed independence– he was complaining, not instructing—it was still a jarring departure from the recent tradition of presidents leaving the central bank alone.
‘He resumed his criticism Friday morning, taking to Twitter to say raising interest rates “hurts all that we have done.” He added, “The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”
‘This isn’t just a problem for the Fed, which wants its decisions seen as driven entirely by economics and data; it’s a problem for Mr. Trump. Inserting himself into monetary policy has virtually no upside and plenty of downside.’
In my view, Trump wasn’t having a go at the Fed. He was having a go at the Chinese and wanted maximum exposure for his trouble, so why not bring the Fed into it? He doesn’t care about convention.
It got the result he wanted…if only for a day. The US dollar fell! Trump doesn’t seem to realise that this supposed Chinese ‘manipulation’ actually benefits the US. It’s a part of the global order. I’ll go into the how’s and why’s of it tomorrow.
Trumps Effect on Gold
For now though, let me show how Trump’s grumbling about the Fed and currency manipulation had an important impact on the US dollar’s nemesis, gold.
On Thursday, the gold price was under pressure. It traded down toward US$1,210 an ounce. By the end of the day, it reversed course and was back above US$1,225 an ounce. It fell again in Friday’s Asian trading session, but thanks to Trump’s tweet, got another boost in the following US trading session and now starts the week above US$1,230.
In my view, gold has bottomed here. At least in the short-term. A rally is due. As well as being technically ‘oversold’ (meaning downside momentum is at an extreme), there are other signs.
For example, the Commitment of Traders Report, released on Friday, shows positioning in the futures market is extremely bearish on gold right now. In the week to 17 July, investment professionals increased their bets against gold by 24,300 futures contracts.
The net short position in gold futures is now 26,500 contracts. At the depth of the bear market in December 2015, there was only two weeks where the positioning was more extreme, at 27,200 contracts.
As far as the futures market is concerned then, we’re at a bear market bottom in terms of gold market positioning. If you see a strong rally unfold this week, you can assume it’s ‘short covering’ as traders buy back their positions to lock in profits.
After that runs its course, you’ll likely see another sell-off. From here, the important thing is that gold doesn’t make a new low. If it makes a ‘higher low’, then you can be more confident gold is in for a decent rally, and that the gold bull market is again underway.
Let’s see how it goes over the next few weeks…
Editor, Crisis & Opportunity