Donald Trump won the presidential election in 2016. Then the next question is: what does it mean to the financial markets? As Mr Trump plans to increase the federal debt to invest in infrastructure, the markets now expect high interest rates worldwide, but if you look at President Trump’s policies more carefully, you might assume something different could take place: rate cuts and QE.
The global deflation and low economic growth are the keys to investment in 2016. The weak demand from the decelerating Chinese economy has pushed down the commodity prices, and Europe and Japan are still struggling to recover from the recession.
- The commodity market crash leads to worldwide deflation: gold, crude oil, natural gas, copper and iron ore
Even the US economy has a symptom of a slowdown now, indicating it cannot support the rest of the world economy alone.
- 2015 4Q US GDP: the slowdown of the US economy becomes clearer, the exports sink due to the strong dollar
The advanced economies have already relied on the quantitative easing, and if even the QE cannot revive the economies, what would be the cause of such a strong deflationary force? Larry Summers, the former Treasury Secretary, called it secular stagnation.
The currency war, the market turmoil and the secular stagnation will make the gold price skyrocket to $2,000 in 2017 or 2018.
In Jan, 2016, we predicted the turnaround of the gold price, and since then gold has indeed rebounded from its three-year bear market as you see in the following chart of the gold price:
The timing of our prediction was perfect. Investors finally realized three or four rate hikes in 2016 are practically impossible, and the secular stagnation will keep the US and global economy in need of financial easing. In addition to it, there are several facts for which we can be bullish about gold.
The US economy only grew 1.80% (year-on-year) in the 4th quarter of 2015, slowing down from 2.15% in the 3rd quarter, according to the real GDP data. Regarding its elements, the personal consumption, the fixed investment, the exports and the imports decelerated respectively.
As you see in the chart, the worst element is the exports. It is also notable that the personal consumption did not accelerate despite the radical decline in energy prices.