In general, investors abhor uncertainty; and if anything can be said about Donald Trump, it is that he is unpredictable in all things other than being belligerent and mercurial.
His inauguration speech was a populist, nationalist and insular manifesto that did little to persuade markets that the 45th president of the United States will maintain the stability brought by the Obama administration after rescuing the US economy from the crashing free fall into the red orchestrated by George W Bush’s misadministration.
In uncertain times, when leaders talk about trade wars, investors seek refuge. The initial refuge of choice after Mr Trump’s victory over Hillary Clinton was the US dollar. The rise in the dollar from early November to last week was explained as the result of Mr Trump’s pro-growth, pro-business, and regulation-friendly agenda.
However, after the lack of clarity in Mr Trump’s inauguration speech, we woke up to Asian investors selling the greenback. They sought safe haven in gold and sent bond yields higher. That followed the second straight week where investment funds bought gold while increasing their gross short on the US dollar, this is after having cut a net-long by 88 per cent from the record in July. This dissipates the fantasy of institutional investors having a positive outlook about the incoming administration.
Surprisingly we see equities remaining high throughout established markets, which makes us believe it is a great time to buy protective options and lock in gains.
Our chief economist and investment officer at Saxo Bank, Steen Jakobsen, has pointed out the likelihood of Mr Trump replicating former president Richard Nixon’s weak dollar policy from the 1970s. That is an agenda of browbeating the Federal Reserve to maintain inflation low – a populist approach.
Today presents a confrontation that will be worth watching. One point of consistency throughout Mr Trump’s campaign, his victory speeches and now his inauguration speech, is his commitment to invest big in America’s infrastructure. His promise to build roads, bridges, airports, tunnels and highways all across the US, in combination with his other consistent promise of tax cuts and fiscal stimulus, is a recipe for runaway inflation. The Fed will probably feel the need to provide a backstop by fixing the 10-year yield at around 1.5 per cent, deflating the dollar even more.
Such a scenario is sadly not far-fetched and is in line with Mr Jakobsen’s observations about Trump’s neo-Nixonian doctrine. It is wise to review Nixon’s executive order 11615 in line with the Economic Stabilization Act of 1970, which imposed a 90-day freeze on wages and prices to counter inflation. It was a move not seen in the US since the end of the Second World War.
At the time Nixon also imposed an import surcharge of 10 per cent to ensure American products would not be at a disadvantage from the expected fluctuation in exchange rates. Does that not sound a bit Trumpesque?
But not all is doom and gloom. There is a silver underlining to the 1970s lesson. Gold appreciated markedly and more importantly, Nixon was forced to resign to avoid being impeached for acting out his paranoia and disregarding the rule of law.
Another bullish theme that is likely to push up gold prices during 2017 will be the negative interest rates across the world, which have created an environment of depressed yields. This means that active money managers are likely to search for alternative investments – gold being a safe bet when anti-establishment votes are raising geopolitical risks not only in the US but also in Germany, France, Belgium and Italy.
Central banks will also add to the positive pressure on gold as they try to diversify their portfolios as a hedge against their own inflationary policies.
By looking at the five-year chart for gold in US dollars we can see resistance currently at $1,320 after falling to $1,210 by December 31. The long-term downtrend was tested and rejected five times in 2016. Also, January is normally a strong month for gold, rising in four out of the past five years.
Long term, our outlook for gold is therefore bullish at $1,325. Short-term resistance at $1,120 looks solid ahead of the next key level, which is $1,130. Support, meanwhile, has been established at $1,195.
But, of course, we now have to see what Mr Trump’s “America First” looks like after being made “Great Again”. We live in interesting times.
Mario Camara is the head of Saxo Bank in Dubai.
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