Looking ahead to the first full month of Donald Trump's presidency, many investors may have gotten a bit "over their skis" on resource stocks.
Most metal prices are going to face a strong headwind in dollar strength from Trump's protectionist pro-growth agenda. The Federal Reserve will make moves on any fiscal stimulus to raise U.S. rates at a pace much faster than the European Central Bank, because Germany and Southern Europe are on different growth paths, and Mario Draghi, president of the European Central Bank, has no answers.
Gold in particular will be negatively affected by dollar strength. This is why I have been calling for gold in euros to set all-time highs in 2017. I do not think there will be a large pullback in gold over the next month (and especially not in euro terms) as positioning is presently very light and SPDR Gold Trust (GLD) and other gold ETFs have seen massive outflows since Trump's election.
Still, there has been upward momentum in gold since the start of the year fueled by commodity trading advisor (CTA) short covering. This momentum is starting to look as if it has peaked in the short term, so February could be a tough month and you may get a better entry point as gold may retreat back below the 50-day moving average.
Macro investors moved out of gold and on to equities for two main reasons, the expectation for dollar strength and Trump's tax and regulation overhaul. The risk on trade proved that there was no need to own gold for portfolio protection. This was reversed since the start of the year and gold has rallied back by nearly $100 as the timing and priority of tax and regulatory overhaul may take a backseat to trade and border adjustment taxes.
None of these issues are going to be sorted out quickly as politicians have a way to slow down any president no matter how bold or brash. I believe there will be enough volatility and uncertainty in the market and enough money on sidelines for gold to remain a part of prudent portfolios. By the end of February, it will be time to add gold and other "safe haven" assets to portfolios.
I also believe that the copper/gold ratio, which is a traditional risk barometer and sits at all- time highs will peak by mid-February. An investor needs to look no further than Trump's nominee for the Office of Budget and Management. The pick, Rep. Mick Mulvaney, R-S.C., who has been focusing his testimony on reducing the $20 trillion debt as a reason why you need some gold in your portfolio. Although Mulvaney's testimony has been centered on the two "saved cows" of Social Security and Medicare, it will be the March debate on raising the debt ceiling that could get contentious in the first quarter. I would want to be long some gold ahead of this.
Although I am fairly blase about gold in the short term from present levels of $1204/ounce, I do think gold will outperform both the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) , which represent both major gold producers and junior gold producers. GDX is up 84% and GDXJ is higher by 124% in the past 12 months.