Before he became the President of the United States, Donald Trump had generated controversy over a number of issues. One of his hot-button topics was the Federal Reserve; specifically, the monetary policies of Fed Chair Janet Yellen. In no uncertain terms, Trump accused Yellen of creating an artificial economy by manipulating the key interest rate. This had the effect of spiking the inflation rate, and creating the illusion of “increased demand.”
That Donald Trump won the general election was a surprise to all, but not necessarily a pleasant one for Janet Yellen. In her view, she was doing everything she could to gently massage the economy towards full — or “full-ish” — capacity. A hothead like Trump could undo the fragile balance, and to be fair, that is a legitimate concern. The core value of Donald Trump has never been to back down from a fight, no matter how trivial.
But the awkward part for conservative supporters of the President are gold prices. Several of Trump’s electorates had undoubtedly hedged the election — they believed in the candidate’s message, but doubted his chances. Gold prices, in turn, rallied for much of October after taking an unfortunate spill earlier in the month. At the time, Trump was mired in controversy. It was only logical to believe that the benchmark interest rate would eventually decline, and that the inflation rate would rise.
That of course didn’t happen. On November 9, one day after the historic election, the 10-year U.S. Treasury Yield — which is the barometer for the key interest rate — jumped 10%. Since that one-day rally, the yield has gone on to gain an astounding 17%. Gold prices, in contrast, took a sharp spill, losing nearly 10% from election day to the end of 2016.
Although Donald Trump won the political sphere, it would seem that Janet Yellen and the Federal Reserve had the last laugh financially. Yellen promoted the idea of policy hawkishness, and ironically, thanks to “The Donald,” she got what she wanted — a rise in the key interest rate, and by logical extension, a decline in the inflation rate. The erosion of the “barbaric relic” of gold prices was a mere bonus for the Federal Reserve.
However, something weird is happening in 2017. Despite the obvious bearishness of gold prices thanks to the inflation rate “ceiling,” bullion is staging a robust comeback. Gold is up nearly 7% year-to-date. And while the interest rate has largely flattened since the beginning of January, inflation expectation is actually up. In fact, expectations for a higher inflation rate is soaring.
Based on the “10-Year Inflation Breakeven Rate” provided by the Federal Reserve, the inflation rate expectation dropped a whopping 31% between 2013 and 2016. Out of nowhere, expectations from the end of last year till now have skyrocketed more than 28%. We’re still off from the highs of 2013, but nevertheless, this is a sharp contrast to the implications of a Donald Trump presidency.
As we mentioned, when Trump took the election, the interest rate flew to the moon, and gold prices collapsed. That the current administration is bad for gold prices is the logical and broad consensus. However, the inflation expectation is measured by what financial experts and insiders believe. The expectation is built on metrics of people who have greater tools — and let’s face it, greater information — than folks on Main Street. The insiders are the ones that are silent screaming that gold prices are ready to rock once again.
In my next post, I will go over the statistical data that forecasts the next leg in the gold bull market.