Gold, Miners Under Trump
Donald Trump's epic underdog victory climaxing the US presidential race was radically unexpected by the great majority of the world. Equally if not more surprising was the subsequent days' market reaction. Stock markets, gold, and gold-mining stocks did exactly the opposite of what was universally forecast for a Trump win. This has left contrarian traders wondering how gold and gold stocks will likely fare under Trump.
Personally I'm thrilled and filled with hope for America with Donald Trump being our next president! We desperately needed someone to overthrow Washington's stranglehold on our lives. In both our monthly and weekly newsletters published before Trump's apparent upset, I took the contrarian stance explaining why Trump had far greater odds of winning than widely assumed. The stock markets predicted a Trump win too!
Still election night was a grueling nail-biter. As my wife and I watched the results dribble in, I marveled at the unfolding futures action. The way the electoral votes played out, Trump had to win Florida to have a shot at claiming the presidency. As Florida's vote counts rose, Trump and Clinton traded the narrow lead. The violent reactions in the futures markets as Trump's chances of winning Florida grew were incredible.
Everyone, mainstreamer and contrarian alike, expected stock markets to tank and gold to surge if Trump won the election. That was logical and reasonable given how the markets reacted after that late-October FBI revelation that a big new trove of Clinton e-mails were found to investigate. That drove the longest stock-market losing streak in 36 years, and gold surged in a major rally. Election-night futures mirrored this.
With expectations for a Clinton win overwhelming, as Trump pulled ahead in the electoral-vote count stock futures literally plummeted. S&P 500 (SPX) futures dropped more than 100 points, limit down at a 5% loss! Dow Jones Industrial Average futures collapsed as much as 800 points. All that extreme stock-market selling ignited a massive safe-haven gold bid, with this metal rocketing from a $1276 close to $1337!
With gold soaring, naturally the gold stocks trading in Australia and Asia were soaring. If those gigantic gold gains had held, Wednesday would have seen one of the largest gold-stock up days on record. But around midnight EST, stock futures started to stabilize. Later when Donald Trump gave his excellent magnanimous and unifying victory speech indicating Clinton had conceded, stock futures blasted back up.
So that safe-haven gold bid quickly evaporated, which wasn't odd given the circumstances. The strong pre-election and election-night gold-futures demand was driven by weakening stock markets. Gold is the ultimate portfolio diversifier because it tends to move counter to stocks. So the futures speculators who had flooded in as stock indexes plummeted had no reason to stay as stocks violently rebounded.
That action defying all expectations of what would happen in the wake of a Trump victory continued on Wednesday. The SPX rallied 1.1% in its biggest post-election-day rally since 1980 when Reagan also surprised pundits with a big win. With stock markets just 1.2% under their mid-August all-time record high, futures speculators continued to dump gold. It dropped from $1300 in early US trading to just $1277 on close.
While the flagship HUI gold-stock index still climbed 2.5% despite gold only edging a very-disappointing 0.1% higher, sentiment was devastated. The overnight setup for 15%+ gains in gold stocks on Trump's surprise win was totally obliterated. This left gold-stock speculators and investors depressed, dejected, and very uncertain of this sector's future under Trump. And we are a conservative lot politically, Trump supporters.
The stock-market rally no one saw coming on a Trump victory is certainly understandable. His policies are very pro-growth, and hence fantastic for the US economy over the long term! And with American voters honoring Republicans with ongoing control of both the Senate and House, the Trump and Republican economic agendas can move forward unimpeded. This should unleash powerful economic growth.
Donald Trump campaigned on slashing business-strangling regulations, draining the meddling swamp of Washington, majorly lowering personal income-tax rates while greatly simplifying the byzantine tax code, greatly cutting the corporate-tax rate, and ensuring American exporters benefit from fair trade deals. He also promised to slay Obamacare, which has devastated the middle class with skyrocketing insurance costs.
All this is great news for American families and the US economy, which is why stock markets rallied on such wonderful pro-growth policies. Trump is also talking about a massive spending campaign to rebuild our failing infrastructure and put people back to work. Wall Street has always loved the idea of fiscal stimulus, as higher government spending translates into bigger profits for companies doing the work.
Seeing the Republicans led by Donald Trump blessed with two to four unhindered years to start to undo the colossal damage done by the Democrats' and Obama's disastrous socialist policies is a dream come true. My heart is filled with joy at my children inheriting a much-stronger country now that the American people wisely chose a better path. Trump will appoint judges who respect our Constitution too, not trample it.
So in light of all this, are Trump's awesome pro-growth policies unleashing a new stock-market bull that will retard gold investment demand for years to come? Almost certainly not! The stock markets heading into this election were wildly overpriced relative to underlying corporate earnings, trading way up near bubble levels. At the end of October, the average P/E ratio of the elite SPX companies was a staggering 26.3x!
That was still pushing the 28x bubble level, which is twice the historical fair value of 14x. These lofty levels are the direct result of the hyper-easy Fed artificially levitating the stock markets since just after Obama's 2012 win. They have been long overdue to roll over into their next cyclical bear after such a long bull run, which would force stock prices low enough for long enough for underlying profits to catch up.
Donald Trump himself understands this well, and has warned many times in recent months that stock markets are in a bubble. In his first presidential debate with Clinton on September 26th, Trump said "Believe me, we are in a bubble right now, and the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that's going to come crashing down. We are in a big, fat, ugly bubble."
He directly blamed that on the Yellen Fed in that very debate, "We better be awfully careful and we have a Fed that's doing political things. This Janet Yellen of the Fed. The Fed is doing political things." He said when they hike rates "you will see some very bad things happen. Because the Fed is not doing their job. The Fed is being more political than Secretary Clinton." Trump knows these stock markets are fake.
There's no doubt he and his smart advisors also know that market cycles can't be stopped. If the stock markets are overdue for a bear market due to wild overvaluation, one is inevitable no matter what the government is doing. And politically, it makes no sense at all to try and delay the inexorable bear. They tend to run for a year or two, and early in a new presidency is when weak stocks do the least political damage.
If straight-talking Donald Trump continues to be honest with the American people about the state of the US stock markets and the great economic damage the Fed's near-zero rates are causing, all this post-election euphoria is going to yield to serious selling. If Republicans see this as unavoidable, they will want to encourage rather than suppress it. They want the stock bear to end well before the coming elections.
The sooner that Fed-delayed stock bear starts, the sooner it ends. That greatly increases the odds of a subsequent new stock bull being well underway by Trump's 2020 re-election bid or maybe even the 2018 mid-term Congressional elections. All the Republicans including Trump have every incentive in the world to get out all the bad news about the precarious state of the stock markets as soon as possible.
Unlike Obama who had the great luck to start his first term right after the first stock panic in a century when a major new stock bull was guaranteed, Trump is starting his first term after one of the biggest and longest stock bulls in history courtesy of extreme Fed easing and jawboning. There is little chance the stock markets are going to rally for the next few years without a normal 50%ish cyclical bear somewhere in there.
With valuations near dangerous bubble levels today, no matter how awesome Trump's policies are the stock markets still face serious near-term downside. And no matter how fast Trump's team is able to hit the ground running next year, it still takes time to implement and execute policy changes followed by even more time for Americans and corporations to enjoy their benefits. Obama's economy can't be quickly fixed.
When these artificial Fed-goosed stock markets inevitably roll over anytime here, the very same heavy gold investment demand that fueled gold's major new bull market in the first half of 2016 will come roaring back with a vengeance! Traders will rush to deploy capital into counter-moving gold since it has always been the ultimate portfolio diversifier. These young gold and gold-stock bulls will accelerate under Trump.
And not just because of an overdue stock-market bear. For all the great economic benefits Trump's new free-market and pro-taxpayer policies will have, they are going to really run up the deficit and national debt. Despite all Trump's great ideas, he's certainly never been mistaken for fiscally-conservative. All his new infrastructure spending isn't funded by new taxes, so it will have to be fully financed with new debt.
The huge coming tax cuts, welcome as they are, will also take a major bite out of government revenues. Hopefully eventually lower taxes will grow the economy and tax base so much that in the long run the overall tax collections will be higher even at much-lower rates. But for some years before that supply-side multiplier kicks in, Trump's tax cuts will directly add to ballooning deficits and fast-rising federal debt.
Regardless of Trump's hostile views on the Fed's near-record-low rates, big deficit spending is going to put huge pressure on Yellen and crew to keep rates low. They may even have to resume directly monetizing the US debt through a new quantitative-easing campaign, conjuring new money out of thin air to buy up US Treasuries! Both policies are highly inflationary and thus very bullish for gold investment demand.
The high inflation hiding beneath the surface in the Obama years should become far more evident to all under a Trump presidency. Lower taxes will boost incomes and thus the amount of money flowing through the real economy. That will serve to bid up prices faster. So American investors are likely to soon see all kinds of signs of accelerating inflation, which will naturally lead them to increase their gold investments.
Higher incomes due to lower tax rates will also unleash lots more capital for investment. While much of this will flow into stock markets, plenty will also seek gold. Every investor should always have at least 5% to 10% of their portfolio invested in gold, which acts as insurance since gold moves counter to stock markets. Interestingly big capital inflows into gold and the stock markets aren't mutually exclusive either.
Between November 2008 just after Obama's first win during that stock panic and August 2011, gold blasted 167% higher in a mighty secular bull on strong investment demand. That was despite a parallel strong stock-market bull, the flagship SPX powered 32% higher over that same span! So if great capital is unleashed to flood into the markets, both stocks and gold benefit. Gold doesn't need a stock bear to thrive.
So despite gold's weak reaction in the wake of Donald Trump's amazing underdog win, probabilities still overwhelmingly favor gold's strong new bull remaining young. The stock markets are still overdue for a major new bear market, which will greatly boost gold investment demand. On top of that Trump's big infrastructure plans coupled with big tax cuts are going to drive huge deficit spending, which is bullish for gold.
Yes Trump's awesome policies spurring much-higher economic growth are wonderful news for the US economy over the long term. But they are going to take some years to implement and actually accrue real economic benefits for Americans. And in the meantime, stock-market cycles won't be magically negated. Not even mighty Donald Trump can delay the certain reckoning from the Fed's stock-market levitation.
And if gold continues to power higher on balance in the coming years just as it did under Obama's big deficit spending in the late 2000s, gold stocks will naturally follow it higher and amplify its gains. That's always the way gold stocks work due to their great inherent profits leverage to gold. The gold stocks were actually faring reasonably well technically Wednesday despite gold's surprising weakness after Trump's victory.
Gold-stock sentiment was already super-bearish heading into this week's anomalous gold action. This sector had plummeted in early October on stop losses being run sparked by a parallel mass stopping in gold futures. That dragged its total losses deep into massive-correction territory at 30.9% since this young gold-stock bull peaked at a phenomenal 182.2% gain over just 6.5 months back in early August.
But ever since then despite the rotten psychology that exceedingly-rare extreme drop spawned, gold miners' stocks have been grinding higher on balance along support. They stabilized along their 200-day moving average, the strongest support zone in ongoing bull markets. And a new uptrend is forming, as is always the case after a correction breaks the previous one. This chart sports very-bullish technicals.
So the gold miners' stocks actually weathered the initial post-election gold surprise fairly well. Although they understandably took a substantial hit as confused gold-futures speculators rushed to sell when stock-index futures rebounded violently on election night and Wednesday, no real technical damage was done. As soon as this post-election euphoria yields to the hard slow reality of big change, traders will return.
And despite their enormous market-dominating gains in 2016 even now, the gold stocks remain radically undervalued relative to the metal which drives their profits. The easiest proxy for this relationship is the HUI/Gold Ratio, or HGR. Gold stocks still have big gains to come even to reflect today's gold price, let alone where this gold bull is heading in the future. The gold miners' upside potential from here is great.
I explained this chart and its implications in depth about a month ago arguing that gold stocks were a screaming buy. They still are. Gold stocks are still recovering from brutal all-time lows relative to gold seen early this year, when the HUI was battered to a 13.5-year secular low. Back in January right at those extreme lows, this HGR proved gold stocks were trading at fundamentally-absurd prices and due to soar.
At worst the HGR fell to 0.093x, or the headline HUI gold-stock-index level was just 9.3% of prevailing gold price levels. Smart contrarian traders tough enough to fight prevailing sentiment to buy low then nearly tripled their money by summer, an amazing gain! That left the HGR at 0.209x, still cheap relative to historic precedent. This key fundamental indicator fell to 0.157x in mid-October and 0.162x on election day.
Yet in the last normal years between 2008's stock panic and 2013's radical market distortions by the Fed's unprecedented open-ended QE3 campaign, the HGR averaged 0.346x between 2009 and 2012. So merely to mean revert back up to normal levels relative to today's gold prices, not even overshoot, the gold stocks still need to rally another 113% from here. That's an easy double for contrarians willing to buy low!
So don't be misled by the markets' extraordinary head fake on Trump's surprise victory. No matter how wonderful his economic policies prove to be, the stock markets remain near bubble valuations and an overdue reckoning is still unavoidable. And gold's young new bull market, and thus gold stocks' parallel one, remains very much alive and well. Trump's win didn't magically change underlying market realities.
This anomalous gold weakness on the anomalous stock-market surge offers an outstanding buying opportunity. All investors, which generally remain wildly underinvested in gold, can easily add portfolio gold exposure with the flagship GLD SPDR Gold Shares gold ETF. And the leading GDX VanEck Vectors Gold Miners ETF containing some of the world's best gold stocks will really amplify gold's rebound.
I've always preferred buying the best of the individual gold miners though, as the elites with superior fundamentals will enjoy gains far exceeding their sector benchmarks'. The big ETFs are unfortunately over-diversified and bogged down with many underperformers. A carefully-handpicked portfolio of gold stocks that excludes this dross will really magnify sector gains. Why bother owning the inferior companies?
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The bottom line is neither the stock markets nor gold acted as expected after Donald Trump's epic win. While the former initially tanked in election-night futures trading driving the latter to soar, these violent moves soon reversed on a conciliatory Trump. That led traders to believe the Trump presidency will be nothing but good news for overvalued stock markets, which would likely seriously retard gold investment demand.
But no matter how awesome Trump's pro-growth economic policies ultimately prove, these Fed-levitated stock markets near bubble valuations still face an overdue bear. That's super-bullish for gold since it tends to move counter to stocks. And Trump's big-spending agenda is going to fuel big deficits, debt, and inflation for years to come. Investors will flock to gold and gold stocks on balance in such an environment.
Nov 11, 2015
Thoughts, comments, or flames? Fire away at firstname.lastname@example.org. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!