Investor Alert

New York Markets Open in:

July 26, 2016, 1:02 p.m. EDT

Could gold fall to $850 an ounce if Trump made America great again?

It’s a competing scenario, but one worth reviewing

By Nigam Arora

Getty Images
Donald Trump has vowed to renegotiate trade deals if he is elected president. That would likely reduce the current account deficit, weakening gold.

The sole objective of this article is to help investors make money on gold while staying politically neutral, so I am arguing neither for Donald Trump nor for Hillary Clinton as the next president of the U.S.

A call from ABN Amro on July 22 for gold to rise to $1,850 an ounce if Trump becomes president made eye-catching headlines. (Gold traded at about $1,328 on July 26.) The Netherlands-based bank said a Trump presidency would weaken the fundamentals of the U.S. economy and, thus, drive up the price of gold.

Not so fast, ABN Amro. There is a contrasting scenario in which a Trump presidency would strengthen the U.S. economy and drag down the price of gold to $850 an ounce.

I am not for or against those two scenarios. This is not out of choice, but rather because there is no credible hard data to support either one with reasonable certainty. My longtime readers know that one of my main investing principles, which has come to be affectionately known as Nigam’s Second Law of Investing, is that no one knows with certainty what is going to happen next at any given time.

A big part of our research at The Arora Report is devoted to precious metals. Our algorithms work on hard data, and there simply is not enough of it to predict who will be the next president and, furthermore, what will happen to gold during the next president’s term.

Historically, it pays when investors are politically neutral. It’s also beneficial to review contrasting scenarios ahead of time without falling in love with any one of them.

ABN Amro has already made a presumption that Clinton will probably win, and if Trump were to win, it would weaken the U.S. economy and move gold to $1,850. This is roughly equivalent to $170 in the popular gold ETF SPDR Gold Shares (PSE:GLD) up from about $126 on July 26.

Now walk with me through the contrasting scenarios, and for a moment give Trump the benefit of the doubt.

King dollar

Serious precious-metal investors already know there is a strong inverse correlation between the U.S. dollar and gold. In simple English, gold is priced in dollars; therefore, when dollar gets stronger, gold gets weaker.

ABN Amro provides an informative chart showing gold falling 47.6% during Ronald Reagan’s first term, gold declining 18.5% during George H.W. Bush’s term, gold dropping 26% during Bill Clinton’s second term, and gold plunging 36.6% in President Obama’s second term. During those periods, the U.S. dollar rose.

Dollar repatriation

U.S. companies have stashed trillions of dollars overseas. They would like to bring those dollars back to the United States, but heavy taxes on repatriation make it prohibitive.

One of the staples of Trump’s campaign speeches has been that he will advocate for change in the tax laws to bring all this money back to the U.S.

Under Trump, the effect of trillions of dollars flowing back to the U.S. would be a significant strengthening of the dollar. A strong dollar translates to weaker gold.

Trade imbalances

At present, the U.S. runs a very large current account deficit. In simple English, we buy more from other countries than we sell to them. This causes dollars to flow out of the U.S. and, thus, weaken the dollar. A major priority for President Trump would be to renegotiate trade deals. The renegotiated trade deals would likely reduce the current account deficit. That would make the dollar stronger and gold weaker.

Make America work again

Trump is talking about bringing manufacturing back to the United States and eliminating illegal immigration. Even marginal success on those fronts would increase employment. As employment increases, the Federal Reserve would run out of excuses for not raising interest rates. When the Fed raises interest rates, the dollar would go up and gold would weaken.

Make America great again

Is not the hallmark of a great America a strong dollar?

Gold at $850 an ounce

Every seasoned gold investor knows there is truth to the old adage: “Gold goes up the stairs but comes down the elevator.”

Gold is a relatively small market compared to equities, bonds and currencies. Comparatively it takes very little money flow to move gold by a large amount.

Based on the number of emails I receive, gold investors’ losses after the precious metal peaked at $1,904 in 2011 are still on their mind. It would not take much for gold to fall into negative momentum, just as it did got swept up in positive momentum this year. Amateurs will buy gold near old lows under $1,100 with stops under $1,000, making them easy prey for professionals and algorithms that take out the stops. As a result, a quick spike down to $850 can as easily occur as a move up to $1,850.

What to do now

It is important to understand both $1,850 and $850 gold scenarios ahead of time. That way, investors will be able to act with conviction once hard data become available.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions in stocks described in this article any time. All recommended positions are reviewed daily at The Arora Report and subscribers may receive additional information in real time not available to the readers of this article.

Link to MarketWatch's Slice.