If Trump succeeds with his economic policy, then gold should struggle
This trade alert would normally be behind the paywall, but since my subscription price will increase to $35/month on Dec 1, I am making this post free to all subscribers.
I went short gold Dec in the paid subscriber chat earlier this morning shortly after the Asia open. Some paid subscribers mentioned that they can’t access the chat due to a Substack glitch, so I am sending this alert out.
The market already moved in my favor by 34 points within the space of a few hours. However, this trade has a long runway as my target is at 2480, and the reasons for this trade should remain valid for a while.
I was previously bullish gold in this newsletter for almost a year, but went neutral in September. Since then, I have been trading gold from the short side, with my most recent short netting a $198 profit on the move in futures from 2747 to 2549.
Long gold has been a favorite trade for global macro investors. Almost every interview by a global macro investor seems to support a long gold view, and I don’t remember the last time I heard anyone who was negative or even not bullish on gold. The reasons to be long gold usually come down to the following:
US government borrowing is on an unsustainable path. The Treasury and the Fed will need to find ways to support the Treasury market by cutting rates and doing QE, therefore stoking monetary inflation.
Central banks are trying to wean themselves off the dollar-based global financial system, and are therefore accumulating gold for their reserves at a rapid pace.
Gold is a hedge against intensifying geopolitical risk.
Gold is a defensive asset that has stood the test of time and has a track record of appreciating against USD over decades and centuries, and therefore should be a part of every portfolio.
I’ll go through why all four upside drivers are weaker today than they were a few months ago.
Early in Trump’s campaign, the common market wisdom was that Trump under a Republican sweep would spend uncontrollably and let the budget deficit widen. Then Trump brought in Elon Musk and Vivek Ramaswamy to create the Department of Departmental Efficiency to cut waste government spending. The appointment of Scott Bessent further solidifies Trump’s credibility in making the government more efficient. Bessent is a prominent global macro investor who previously worked under Soros, and now managed a global macro hedge fund. He is acutely aware of the existential risk that uncontrolled spending and borrowing creates for the US, and has advised Trump to pursue a “3-3-3” policy that includes cutting the budget deficit to 3% and maintaining GDP growth at 3%. This is the first presidential administration since Clinton that has entered the White House on a platform of fiscal responsibility. If Trump succeeds in improving the efficiency of the government and reducing its size, it would be the most impactful and long-lasting initiative of his administration, and would negate the need to support the bond market or restart QE for the foreseeable future.
Central bank purchases of gold increased significantly after 2022, but they dropped off in Q3.
Source: World Gold Council
China was a major purchaser of gold until May of this year. After that, demand has flatlined, according to official data.
Trump has a track record in his campaign rhetoric and in his previous administration of favoring peace and avoiding geopolitical conflict. His preference is to make friends with America’s enemies and negotiate his way out of having to fight or fund hot conflicts around the world. He claims that he will broker a peace deal between Ukraine and Russia, while his stance on whether the US will protect Taiwan against Chinese aggression is ambiguous. Odds are that there will be less geopolitical conflict under Trump. However, these things are impossible to predict, and if China initiates a naval blockade of Taiwan in the near future, then all bets are off the table.
I agree that gold should be part of every asset allocation due to its defensive characteristics and strong record as a hedge against monetary inflation. I still hold some in my long-term portfolio, but not as much as I did earlier this year. If Trump succeeds at boosting GDP, keeping inflation low, and cutting government spending, I expect capital to rotate out away from the defensive characteristics of gold and into offensive, return-generating assets like equities. Gold tends to trend higher in spurts, followed by years of sideways price action. CFTC data shows that speculative longs tested decade highs in September. Since then, they have retreated slightly. The last two times CFTC gold longs rose above 300,000 contracts and retreated back below 250,000, gold entered a sideways range for at least two years. We may be seeing a similar pattern unfold.
Yellow line, top panel: Gold spot price. White line, bottom panel: CFTC net non-commercials futures positioning. Vertical red lines are where positioning retreated from 300k to 250k contracts.
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Did the substack chat disappear