Trump Will Be Good for Gold

 | Jan 07, 2017 | 12:00 PM EST
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I've written several reference columns recently specifically with the intention of relating economic, fiscal and political ideas, concepts and issues that investors need to be aware of before Donald Trump is inaugurated.

The reason it's important to be aware of them now is that Trump has a proactive political and economic agenda. He has a vision and goal for restructuring how the federal government interacts domestically with states and citizens and how it interacts with other countries. He will not simply allow policy to be reactive or dictated by immediate domestic or international circumstances. It is a broad ideological construct that, based on his rhetoric, does not fit the traditional consensus platforms of Republicans, Democrats, conservatives or liberals.

How successful he'll be at creating consensus in Congress and convincing the members there to go along with his agenda will require transcending party lines and be determined by the degree to which that is achieved.

The pursuit of his agenda also has direct ramifications for the Federal Reserve, it's independence and the operation of U.S. monetary policy, as well as how other countries manage theirs.

For Trump to be successful it is likely that the operation of monetary policy will have to change.

In this column I'll address the monetary policy concept of the "impossible trinity" or "trilemma," because monetary policies as practiced by the world's major central banks will probably be challenged by Trump's agenda.

The impossible trinity states that a country can have any two of 1) a stable exchange rate 2) independent monetary policy and 3) free capital flows. But it can't have all three simultaneously.

The U.S. currently has an independent monetary policy and free capital flows, and thus accepts volatility of the value of the U.S. dollar.

Trump will have the opportunity to appoint two members to the Fed's board of governors to fill vacancies and has stated that he will do so within the first few months of being in office.

Those folks will likely support the transition of the Fed's monetary policy to something that is not distinctly any of the three options considered by the impossible trinity but is a combination of all three -- contrary to the impossibility proviso.

The first thing that would likely be pursued is the implementation of macro-prudential policy tools that could be used to target specific sectors of the financial markets and economy rather than the economy broadly.

I've addressed this issue many times over the past several years but suggest at least reading the column, "The Fed Needs a New Mandate."

The implementation of macro-prudential tools by the Federal Open Market Committee that are compatible with Trump's beliefs would greatly enhance Trump's tax and regulatory reforms. That is because they would provide an avenue to execute on his threats to punish companies that do not comport with his nationalist business agenda.

Such policies could have the effect of essentially implementing capital controls by proxy and thus also enhance Trump's ability to exact concessions from trading partners for the negotiation and renegotiation of free trade agreements.

It is also possible that Trump could attempt to bring back some degree of hard backing for the dollar, either through gold, gold and silver or a basket of commodities.

I'll address that issue more specifically in a separate column.

Regardless of that issue, however, uncertainty about the operation of monetary policy during the Trump administration will almost certainly prove to be beneficial for gold and gold miners.

The best way of participating in that opportunity, as I've written about on many occasions this year, is through the gold miners, with my preferred method of doing so being the VanEck Vectors Gold Miners ETF (GDX) .

I last addressed gold in the column, "Gold Has Lost Ground, but It's Still a Good Play."

I continue to view the decline in gold and the miners over the past six months as cyclical and providing excellent long-term entry opportunities.

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