Why Did Gold Plunge After The Trump Victory?

Secular Investor's picture

trump-infrastructure

Source: politico.com

It has been almost two  weeks since Donald Trump has been voted into the White House and the mass media is finally getting their heads around his victory. Most analysts (well, actually all of them) predicted a victory for Trump would be excellent for the precious metals prices, but even though the gold price increased to almost $1350 when the votes were being counted, we closed last week approximately $150/oz lower and the gold price was barely able to hold the $1200 level.

trump-gold

Source: stockcharts.com

Were we wrong? Was everyone wrong? Why did this happen?

Let’s do some fact-checking here to see why the long-thesis for gold remains in play, more than ever before.

Fact one: Trump has been acting against the Federal Reserve for several months now, claiming the Fed is deliberately keeping the interest rates low to help the current democratic president to leave office on a high. That’s not a ridiculous claim, although the economic recovery might be more fragile than you’d think.

Yes, there has been job growth, but it was predominantly situated in the part-time job categories with low average wages. So, yes, at surface it does look like the economy is doing better, but most of the new jobs barely cover the cost of living, so it wouldn’t be fair to expect a (sustainable) increase in spendable income.

Fact two: The new president wants to jump-start the economy by investing massive amounts in infrastructure-related projects. That’s usually not a bad idea as A) it’s the best way for a government to ‘intervene’ in a domestic economy without becoming too ‘pushy’ or calling the shots and B) it serves a long-term purpose and could actually have a serious indirect impact on the local economy as well.

trump-infrastructure-2

Source: thefiscaltimes.com

But this very likely means the Trump administration will continue the Obama-course and continue to run a budget deficit for the next few years. Theoretically that’s not always negative as the cumulatively added value of getting people back at work and improve the existing facilities might pay off over time, but it will increase the pressure on the budget and the total debt situation.

And that’s what might cause some issues here. Right now, the total national debt is zeroing in on the 20 trillion dollar mark, and it’s not unlikely the Trump Administration will have to run an annual deficit of $1T (although it will very likely be more), and this could easily push the total debt to $25T by the end of Trump’s term. Fine, if the GDP is increasing at a similar pace, the debt/GDP ratio won’t change at all, but if you’re running a budget deficit, have a substantial amount of sovereign debt ànd are calling for higher interest rates, it doesn’t take a genius to realize that could potentially be a deathly cocktail.

trump-interest-rate

Source: CNBC.com

Let’s use the $20T of government debt as our starting point. Should the interest rates increase to 3.5% (compared to 1.5% on the 10 year T-Note before this summer, and 2.335% right now), the total cost of debt would increase by approximately $400B per year. This sure sounds ‘acceptable’ when compared to the total debt, but let’s see what the trickle-down effect could be.

trump-usa-employed

Source: tradingeconomics.com

In the USA, the total labor force consists of 152 million ‘employees’. As it’s tough to tax unemployed people (although governments will always find a way to do so), the entire $400B would technically have to be financed by a higher contribution from the labor force. In this case, every employee in the USA would have to contribute an additional $2,600 per year to fund the additional interest (and not a single dollar of that would be spent on actually reducing the principal amount of that debt).

That’s tough, but the USA isn’t an isolated case.

Countries have become used to and addicted to low interest rates, and it will be very tough, if not impossible, to break through this pattern. Italy might very well be one of the next domino’s to fall if/when the interest rates increase.

The Italian government debt is 2.2 trillion Euro, and a 1.5% increase of the average interest rates would create an annual shortfall of 33B EUR. That’s indeed a fraction of the exposure of the US, but as just 23 million people are employed in Italy, the additional pressure would technically be 1,400 EUR/year (and this is quite a conservative scenario because once the PIGS-issues come back to surface, Italy’s interest rate will very likely increase much faster than for instance Germany’s interest rates).

1,400 EUR/yr is just 120 EUR/month, but try to tell that to people who are making just 1250-1500/month and barely make ends meet.

And this is, and always has been, the real reason to have exposure to gold. Government spending will lead to higher inflation (expectations), and will ultimately renew the interest in gold as a hedge against inflation. And the status of gold as a safe haven will once again be confirmed when higher inflation rates and higher interest rates will push some countries over the edge.

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mary mary's picture

Does anyone here have a handle on or reference to how many ounces (tons?) of gold there are right now, and how many $ there are of paper gold?  Thanks in advance.

Maestro Maestro's picture

If I recall correctly, they sold twice the entire yearly production amount of gold in the space of a few hours, last week? The ratio/number you're asking for is around 500 paper ounces per 1 physical ounce of gold. But that's according to official therefore necessarily false accounts.

mary mary's picture

One difference between ZH and MSM is that ZH runs articles by Real Fake News Sites (as described by Ron Paul) and lets readers decide for themselves.  Good!

Maestro Maestro's picture

***Another stupid and insidious article which deflects from, and covers up, the FACT that the dollar is unlawful and literally not even worth nothing as the US dollar is currently UNDEFINED and also illegal according to the US Constitution or the fundamental law of the country that issues it.  That means an ounce of gold is more valuable than the ENTIRE monetary base of the US of A, meaning an ounce of gold is in reality worth more than a trillion dollars.***

 

 Worse than the bankers rigging gold and silver prices and not having the gold they sold you (or selling gold that they don't have via fraudulent COMEX Futures contracts), is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES currently.

The electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they are, what their economic worth and transactional value is, hence they cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events hence cannot take place where there is literally no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar -- all fiat currencies are basically a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.

Furthermore,

Why do a few people get the right to print fake fiat money out of nothing and buy your goods and  services with it, whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.

 
People,

you are all aiding and abetting crime every time you buy, sell or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because YOU are feeding the enemy!

LickItUp's picture

OK, now tell us the alternative that people are supposed pursue.

Maestro Maestro's picture

As stated above, the people ARE the problem.  If they weren't, they would "pursue":

1. Keeping all their surplus money in precious metals.

2. Never vote for Democrats or Republicans.

3. Mention the truth publicly at every reasonable occasion.

4. Make sure their friends and family know the truth.

5. Whenever possible, refuse to do business with members or acolytes of the status quo.

6. Make life hard if not impossible for members of the status quo.

7. Never induct into the army as the army currently serves the interests of the bankers who are in cahoots with Muslim terrorists who rape, torture and crucify Christians and other normal human beings.

Now, tell me you and your ilk already didn't know all this, troll.

LawsofPhysics's picture

Paper gold or physical  gold...

Big difference.  Remember, when fraud is the status quo, possession is the only law.

AmandaFawndel's picture

Why would the Joo Ess Aye spend money on infrastructure when the ashkeNAZI joo plan is to FLOOD ALL WHITE COUNTRIES WITH INVADER VERMIN, THEN instigate a nuclear war with Russia and China?

 

All White Countires = A ROACH MOTEL FOR UNDESIRABLES!

 

 

 

1) Steal the acquired wealth of all White Run countires. Destroy the middle class, destroy all white culture, demonize whites, Christians, heterosexuals

2) Flood all white countries with muslims, wetbax and all the scum Israel would never take.

3) Instigate a nuclear war with Russia, the last FREE WHITE RUN COUNTRY...because they won't commit suicide by INVADER!

4) ALL White countires Nuke each other, white problem solved, GREATER ISRAEL AND THE JOO WORLD ORDER CAN NOW FLOURISH!

Any questions, GOYIM SHEEPLETARDS?

Vuke's picture

A

"As long as the debt to GDP ratio does not increase". What BS !  GDP is an arifact of central planning manipulation.  "We need more GDP NOW.  Let's throw more sand under the wheels".  .Gov is doing it everywhere to keep op the pretense of growth.  Add in all the roadside vendors and casual workers in China and they'd have 3X the US GDP.  Subtract the lawyers, accountants, bartenders and baristas in the US and the GDP would be that of Argentina.  Manufacturing is the heart of a real economy, not paper shuffling.

bardot63's picture

How about the reason gold slumped is fuck you, Politico.  Never mind the COMEX dumped a billion bucks in paper gold futures into the market during the non-traded wee hours -- never mind CFTC is a chicken-shit criminal enterprise protecting the Plunge Protection Team's illegal and immoral manipulation of gold -- never mind DoucheBank pleading guilty to gold manipulation, meaning manipulation has gone from suspected and charged to proven and admitted. 

And what the fuck is ZH putting this shit in the lineup anyway????  Does ZH not read its own columns?

ToSoft4Truth's picture

I Googled up "Comex dumped".

 

Comex has been dumping since at least 2001.  The best tact would be if one cannot afford a paper loss of gold going to zero, don't buy it. 

 

"At precisely 1:57pm on June 27th, 2001, a seller dumped 100 contracts (10,000 ounces) of gold on the Comex market. The transaction was noteworthy as to the ..."

bardot63's picture

And never mind Politico was in the tank for Clinton, and can't be trusted on anything, and is a piece of shit to start with.

northern vigor's picture

I hope things never get so bad that I have to use my stack.

I hope things just merrily keep going as they are..But if the shtf and I need to pay for a hospital bill for my kids, pay my property taxes, or bribe the cops to go away then I suppose the stack will come in handy.

Until then, I don't care if the price goes up or down it's not for sale...it's just an insurance policy. In fact if it is hammered down, it just makes it easier to stack some more.

Jungle Jim's picture

"Ultimately." "Eventually." NOT the words I want to hear. I've been hearing those words all the way down for quite a few years now.

Food Loaf Junkie's picture

Jungle, I feel for you, and all others who have been forced to sell their reserves just to get by, whether those reserves are pm's, or frn's.  I pray that Trump is at least marginally successful and you and the rest of us can see a little income growth.  Hard working people should not be suffering like this.

jeff montanye's picture

p.m.'s, especially the miners, had a pretty good first half.  hold on for the continuation of this second big leg (like 2002 to 2011, even with the hickey in 2008) starting soon. this putzing from 1350 to 1200 will be forgotten like a bad dream.  january '16 was the turn.

this is the best environment for precious metals since ?  it will beat 35 to 800 (23x) before it is done and it will not likely fall like it did after 800 as the next cycle is inflationary not deflationary like in 1980.  gold at 6000 to 10000 is not a pipe dream.  it will happen.

but when interest rates are well into double digits bonds can get attractive again, possibly.  not now.  sold my last one in july for silver miners, which are down since but i believe in their prospects over the next five years, unlike the treasurys.  

Azannoth's picture

I *feel* that too, as soon as we hit anything resembling a bottom I am loading up big

Jungle Jim's picture

My rent was due on the Fifth. The only way I had to pay that (or anything else) was to sell at least one coin. All I have ever had were physical coins and bars. *No* "paper" gold, *ever. No bonds or stocks ever either.  don't know anything about any of that.

I deliberately postponed selling until after the election, in the belief that the price would rise if Trump won. Clearly, it did not. I negotiated for some more time -- till Wednesday the twenty-third. hat's the day after tomorrow. No way it's going to go up as much as I need it to by then.

I can't keep stalling and postponing for weks or months or years. The landlord wants to be paid. The utility companies want to be paid. The insurance and the property taxes need to be paid.

Azannoth's picture

Sorry bro feel bad for ya, but Gold ist not an investment it's money and we are getting screwed over at every turn. That's what happens when you go gambling and bet against "the House" you can only lose. Time we got our country back and stopped playing by (((their))) rules.

oddjob's picture

Don't waste your fucking time.

JJ is first rate troll, funny how he comes up for eviction or a family need medical bills paid everytime Gold drops.

JawsMusic's picture

s2man, that is only true if the majority of the Debt is ong term, its not, it needs to be regurlarly rolled over to new debt, so when it gets rolled over it will be at the new higher rate.  Moving the duration of most government debt from long term to short term was one of the dumbest things the government has done.

 

katagorikal's picture

Yes, Operation Twist did reduce the average maturity of the debt from 5 years to about 4.5 years, during the period 2012-2014, but it is now back above 5 years - see references below.

s2man's picture

I have to call BS when pundits say rising interest rates will increase the debt burden of a country.   Not.  The bonds were sold at,  and will be paid at the low interest rates.   Increased rates will only affect NEW debt.  I have only seen one commentator get it right when he said, 'rising interest rates will affect the deficit'. That is correct.

auricle's picture

I have to call BS when pundits say rising interest rates will increase the debt burden of a country.   Not.  The bonds were sold at,  and will be paid at the low interest rates.   Increased rates will only affect NEW debt.  I have only seen one commentator get it right when he said, 'rising interest rates will affect the deficit'. That is correct.

 

unless you can't repay the bonds that are maturing and have to roll them into longer dated treasuries at higher rates. Which is what Trumps ecnomic adviser just recommended in a previous article.

Socratic Dog's picture

True, if you actually paid those bonds off.  We don't, we can't, so we borrow more money to pay off the previous debt. Rollover. Also known as a Ponzi Scheme.  So rising interest rates have an immediate effect.  But on a (steadily increasing) portion of the debt, not all of it.

Trump made it plain he thinks the US is bankrupt. Seems to me he's thinking that if people are stupid enough to lend to a self-admitted bankrupt, he may as well take advantage of it before he stiffs them.

Of course, so long as the petrodollar continues, they have no choice but to fund our deficits, they must have US dollars to buy oil.

It's all a bit fucked up.  Only people who'll come out ahead in the long run are the bankers.  Funny that.

Stuck on Zero's picture

Don't be silly man. We don't need to borrow money to pay off bonds. We just print the money. 

katagorikal's picture

Yes, average maturity is about 5 years, so it takes some time for higher rates to appear in the deficit, see Table FD-5, page 26:

http://www.fiscal.treasury.gov/fsreports/rpt/treasBulletin/b2016_2.pdf

The chart here suggests the maturity will increase dramatically over the next 10 years. Presumably the current deficit and rollovers are being funded with long-term USTs, see p24/25:

http://www.treasury.gov/resource-center/data-chart-center/quarterly-refu...