The gold market has been treading water for weeks, supported by Trump’s failure to repeal Obamacare not to mention concerns regarding the President’s ability to implement his broader election platform.
Foremost among the concerns – at least for the market – is Trump’s plan for tax reform. No clear tax plan has been announced by his administration and according to a Reuters report “it has yet to appoint people with the skills to evaluate complex tax laws, draft legislation and sell it to deeply divided lawmakers.” Among the tax reforms being considered is a debt funded tax cut or a Federal goods and services tax which would be applied to a broad range of products and services similar to Canada and Europe.
The timetable for Trump’s promised tax reform has slipped from March to at least August and might well not be in place by year end at the rate things are going. The DOW and S&P are trading within narrow ranges and it’s hard to imagine any news that would enable the market to re-establish its Trump-infused post-election ramp up. Unless Trump starts delivering on at least some of his promises the prospects for a significant market correction appear inevitable.
You can see a strong correlation between spot gold prices and the major stock indexes; weakness in one generally means strength in the other. What’s really uncanny is the apparent algorithm-based trading in gold stocks which move lock step with any increase in the spot price. It’s almost too predictable to be normal. I expect there is some serious accumulation in gold stocks at these relatively low prices in anticipation of potentially much higher prices by year end which will largely be fueled by the confrontational leanings of the Trump administration.
This coming week Trump is meeting with Chinese President Xi Jinping whose country has a massive trade deficit with the U.S. The president is expected to take a hard line with what he describes as China’s “unfair trade practices” and operation of a “non-market economy.” Also on the agenda is Korea’s nuclear program and China’s territorial claims in the South China Sea.
Trade conflicts with its three largest trading partners, China, Canada and Mexico, will be front and centre this year and all have promised retaliation for any tariffs imposed on U.S. imports. Canada, which ran a trade deficit of only US$11.9 billion with the U.S. in goods and services in 2015 – before running a surplus in 2016 – has publicly stated that any tariff would be subject to retaliation. Mexico and China have also promised similar action.
In the meantime, China and Russia have strengthened their alliance to bypass the U.S. dollar in the global monetary system. The Russian central bank opened its first overseas office in Beijing on March 14, part of its effort to phase-in a gold-backed standard of trade. Meanwhile, gold has yet to reflect the potentially tectonic shifts in gold consumption by countries like China which recently announced a major discovery in its largest gold producing region, Shandong province.