Credit Cycles & Gold"The Trump shock produced some unexpected market reactions, partly explained by investors buying into a risk-on argument,equities over bonds and buying dollars by selling other currencies and gold. This is because President-elect Trump has stated he will implement infrastructure investment and tax-cut policies. If he pursues this plan, it will lead to larger fiscal deficits, and higher interest rates. The global aspect of the markets recalibration focuses on the strains between the dollar on one side, and the euro and the yen on the other, both still mired in negative interest rates. The capital flows obviously favor the dollar, and are putting the Eurocurrency markets under considerable strain .. We currently face the prospect of a reallocation of capital from America’s financial sector into government and non-financial activities, driven by President-elect Trump’s expansionary plans. These plans, if pursued, will lead to money flowing from purely financial activities and will have a profoundly negative effect on asset prices. Furthermore, price inflation, the result of fiscal expansion, will raise consumer prices to unanticipated levels, forcing the Fed to raise interest rates more than expected today .. As all experience from the past clearly demonstrates, it is a mistake to believe that the gold price is set solely by dollar interest rates, or its relative strength in other currencies. This being the case, the current weakness of the gold price is simply a reflection of temporary dollar shortages, and nothing more."
- Alasdair Macleod
LINK HERE to the essay