It’s been a historic week in American politics as well as in financial markets. Following Donald Trump’s triumph at the ballot box, the S&P 500 spiked to a new record high.
Investors were in part relieved that the presidential election resulted in a clear winner. Many investors also bought stocks on optimism about potential deregulation and tax cuts under a Trump administration. That burst of positive sentiment helped trigger a selloff in safe-haven assets, including precious metals.
The knee-jerk reaction of metals traders to the election results doesn’t come as too much of a surprise. For now, it’s just a reaction and not necessarily a major trend change.
What was surprising about the election results – at least to most media pundits and pollsters – was the magnitude of Trump’s victory. Few thought he would sweep through every battleground state or capture an outright majority of the popular vote.
In his victory speech, Trump claimed a powerful mandate from the public to implement his Make America Great Again agenda. At the top of his to-do list is securing the border and deporting illegal immigrants. Also big on the Trump agenda is bringing down inflation, providing tax relief, and lifting regulatory burdens.
Trump may be able to get many things done at the administrative level through executive orders. Other priorities will require legislation from Congress or approval from the Senate.
He will have the benefit of being able to lean on a Republican-controlled Congress, albeit with what looks to be a very slim majority. In the Senate, Republicans will have a 53 to 47 majority.
GOP Senate candidates in battleground states performed better than expected. In Pennsylvania, David McCormick scored an upset victory over incumbent Democrat Bob Casey.
That victory could prove to be extremely important. Although it wasn’t needed to secure GOP control of the Upper Chamber, a smaller majority would have enabled one or two anti-Trump Republicans to function as obstructionists -- much like the late Senator John McCain did during Trump’s first term.
Current Republican Senators Lisa Murkowski, Susan Collins, and Ben Sasse each voted to convict President Trump on impeachment charges brought up by Congress four years ago. Whether these unreliable allies will work to try to sabotage Trump’s legislative agenda, or his cabinet and judicial appointments remains to be seen.
Trump’s agenda will certainly face resistance from the permanent bureaucracy in Washington, D.C., or what some call the deep state. The federal establishment ultimately grew bigger during President Trump’s first term despite his vows to drain the swamp.
Part of the problem was that Trump, having no previous experience in government, relied on the advice of establishment figures from the Bush administration as he was forming his cabinet. In a candid interview with Joe Rogan just a few days before the election, Trump admitted that his biggest mistake was agreeing to appoint people who weren’t on board with his agenda.
One of the appointments Trump came to regret was Jerome Powell as Federal Reserve chairman. Powell moved to cut the Fed funds rate by 25 basis points this week. During his press conference, Powell was asked whether he would step down if President Trump demanded his resignation. Powell was none too pleased with the question -and insisted the President has no legal authority to remove him as Chairman.
One of the potential impediments to Trump’s plans to grow the economy are elevated interest rates. Even as the Fed has begun cutting on the short end, long-term interest rates have actually been rising in recent weeks. That translates into higher costs for mortgages, auto loans, and credit card borrowing.
Trump will likely try to pressure the Fed to bring rates down more aggressively. While lower rates might stimulate the economy, they also risk putting upward pressure back on inflation.
Sound money advocates aren’t necessarily hopeful that the next Trump administration will fix the fiscal and monetary problems that contribute to ongoing currency depreciation. Trump will inherit a national debt that is spiraling toward a crisis. The economy could be entering into an official recession just as he assumes office. The political pressure for more fiscal and monetary stimulus could be immediate.
As a consequence, inflation may never get back down to the Fed’s 2% target.
Investors who wish to protect themselves from inflation risk will still want to hold physical precious metals heading into 2025 and beyond. Gold and silver markets initially slumped following Donald Trump’s election victory in 2016, but they made gains by the end of his first term.
The lesson is that pullbacks in precious metals are buying opportunities regardless of who inhabits the White House. The same inflationary fiat monetary system that has existed under Joe Biden will remain in place under Donald Trump.
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