Gold is back below US$1,200 for the first time in nine months, as the US dollar soars away against virtually every other currency in the world.
Two factors are driving the dollar strength and the corresponding weakness in gold. The first is the long-anticipated rise in interest rates that’s likely to come from the Federal Open Markets Committee in December. The second is Donald Trump.
The December rate rise is now priced in to the dollar and then some, and although the markets have got certain other major predictions wildly wrong this year, this time round it’d be very surprising if the call is wrong. The Fed is now one of the few steady rocks in an uncertain and shifting world.
The Fed and the markets at least speak the same language.
And, if markets can’t at least anticipate the Fed’s moves correctly now, what else is there left that can possibly be relied on?
But the independence of the Fed may also make for some interesting battles in the coming years - how the Fed and Trump will get on as the US economy develops over the next four years is one of the current great unknowns of global economics.
For now though, as far as the dollar is concerned they are marching in the same direction and Trump’s influence is more about sentiment than any actual ability to pull policy levers.
But it won’t be long before he gets spending, and at that point he’s certain to have strong opinions about how the Fed responds to what he does.
Trump’s vision involves a repatriation of power, money and influence home to the US, and its deployment in fixing specifically US problems.
If, as some senior military figures have argued, this comes at the cost of a diminution in US global influence then so be it. But those who argue that Trump will end up as some kind of puppet of President Putin’s miss the point.
The idea that some incremental increase in US influence, as envisaged by the technocrats behind the Trans-Pacific Partnership, is in any way meaningful to the voters in the Midwest is anathema to him.
What is the use of global GDP growth if your “heartlands” are dying?
Putin would say the same. As would the Chinese politburo. As would the British government, if it could overcome its post-Brexit schizophrenia.
Trump’s bringing home of the dollar, isn’t accidental, it is planned. The Fed knows this, and will surely acknowledge it in future policy decisions.
Nevertheless, it comes at a cost. The cost of US government borrowing will go up. Interest rates will go up. Inflation too, will likely go up.
Trump’s hope must be that America will be “great again” before inflation is allowed to run away too much, but if it does begin to run, the dance between the Fed and Trump will become interesting.
The Fed gets to make its own policy, but Trump has already shown that he can override the mores of America. If he can override its institutions too, then we really will be entering uncharted territory.
Trump’s rhetoric spoke of a ban on Muslims entering the country. Such a policy would be a theoretical violation of the first amendment and a major step-change in the way the US organises itself politically.
It’s also probably too big a target for Trump to take on initially. So, perhaps instead a tilt at the Fed, which is nominally independent, both financially and politically, but which is also subject to oversight by Congress?
Congress mandates the Fed to engineer “maximum employment and stable prices,” according to the Fed’s own website. If inflation starts to spiral as part of Trump’s drive towards maximum employment, the Fed may find itself as scapegoat.
But can it withstand the attack, where others, including Trump’s own Republican party have buckled? That’s the intriguing question.
The crumb of comfort for gold bulls is that although a honeymoon bliss has now settled upon markets, the uncertainty is sure to return. Trump’s efforts to make America great again may have unforeseen consequences on the balance of global power, and that could see gold making a comeback.
Inflation too is said to be good for gold, although the data to support this is more sketchy. Trump talks of healing the nation. But what’s the betting he will? If he doesn’t, gold will run higher than ever.