VanEck: Gold suffers as irrationality trumps reality

Dec 15th, 2016 | By | Category: Commodities

By Joe Foster, Portfolio Manager and Gold Strategist at VanEck.

VanEck: Gold suffers as irrationality trumps reality

Joe Foster, Portfolio Manager and Gold Strategist at VanEck.

The markets have gone into fantasy mode since the US presidential election. US stocks reached new all-time highs, the US dollar has soared, copper has had a parabolic rise. However, the gold price fell. Those strong moves indicate that the market is pricing in a rosy scenario in which projected Trump tax cuts, infrastructure spending, and regulatory reforms ignite economic growth. This outlook works against safe haven assets like gold and bonds. While we are hopeful for such an outcome, it will be very hard, if not impossible, to achieve in reality.

Will Trump be able to solve imminent issues?

Markets think that Trump will be able to solve imminent issues. While we do believe that Trump, along with the Republican-majority in Congress, might enact many measures that benefit the economy, we think there are a number of obstacles that pose an imminent risk to the rosy scenario that is currently priced into markets. Extreme debt levels, infrastructure limitations, the strength of the US dollar, and the fully valued stock market limit the economy and the prospects for investors. Additionally, the risk of recession may increase in the next four years. The tightening policies of the Fed and rising rates could further weaken the economy.

Regulations stifle growth

One of the reasons monetary policies have lacked efficacy is that fiscal policies have been working against the central banks. Since the crisis, governments have implemented higher taxes and increased regulations, rather than policies to stimulate the economy. Time and cost of compliance saps profitability and deters start-ups and innovation. Large companies have easier access to the credit market and can afford to deal with a maze of regulations. This places small, dynamic companies at a disadvantage which is also why the rate of start-up formation is at a historic low of 8%.

Companies are reluctant to invest in a world with geopolitical, economic, and regulatory uncertainty. As a result, firms prefer cheap credit made possible by central banks for share buybacks and dividends, rather than capital improvements and research. Consequently, productivity has suffered.

VanEck continues to believe in long-term strong gold market

It doesn’t seem the current market is accounting for the challenges the Trump administration faces. The market response to the US election is all based on expectations, not fundamentals. Until a catalyst that shifts market psychology emerges, and as long as bullion ETP outflows continue, gold is likely to struggle. In the longer term, however, our conviction for a strong gold market remains.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

VanEck is the provider of the $123m VanEck Merk Gold Trust ETF (NYSE: OUNZ), providing investors with a convenient and cost-efficient way to buy and hold gold with the option to take physical delivery of gold. The fund’s total expense ratio is 0.40%.

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