As President-elect Donald Trump moves forward with plans to shake up the federal establishment, precious metals markets are experiencing a price shakeout.
Post-election selling in gold intensified this week. The monetary metal took a hit of more than $120 through Thursday’s close.
As we noted in the days before the election, market gyrations were likely to occur following the results. Trump’s decisive win has given the U.S. dollar a boost in foreign exchange markets. It has also raised hopes for a surge in economic growth and a major effort to tackle wasteful deficit spending in Washington.
This week President-elect Trump confirmed that he has tasked business leaders Elon Musk and Vivek Ramaswamy with heading up a Department of Government Efficiency. Ramaswamy proposes cutting the federal workforce by as much as 75%. Musk, meanwhile, suggests that $2 trillion in government waste could be eliminated – in part by eliminating what he calls “fake jobs” in federal bureaucracies.
Elon Musk (on Joe Rogan Podcast): They're all these fake jobs, basically, and that doesn't make sense. So look, we got to do this because the country's going bankrupt. If we don't take action, the dollar’s going to be worth nothing.
Elon Musk (Speaking at Trump Rally): All government spending, it either becomes inflation or it's direct taxation. Your money is being wasted, and the Department of Government Efficiency is going to fix that. We're going to get the government off your back and out of your pocketbook.
Advocates of smaller government are encouraged by the moves Trump is making.
This week he announced a slate of cabinet appointees who aim to disrupt the status quo. Defense Secretary nominee Pete Hegseth has called for the elimination of diversity and sensitivity training in the military and the firing of generals who promote such programs.
Potential Health and Human Services head Bobby Kennedy Jr has vowed to clean house at the National Institutes of Health and Food and Drug Administration by removing hundreds of entrenched bureaucrats there.
Uprooting the Deep State won’t be easy, however.
So-called civil servants enjoy special protections from being fired from their jobs.
Eliminating government agencies or cutting their budgets will require the approval of Congress, which is only narrowly controlled by Republicans. In the Senate, minority Democrats still have enough seats to be able to utilize the filibuster to block Trump-backed legislative initiatives.
Trump’s Department of Government Efficiency will have little power other than to make recommendations and rally public support for them. Even if Trump succeeds in eliminating a lot of government waste, getting certain departments abolished, and shrinking bureaucracies down to size, this sort of discretionary spending makes up only a small part of the federal budget.
The bulk of federal outlays are entitlements, interest on the debt, and national defense – in that order. All this spending is considered mandatory and untouchable. Since it will almost certainly be left untouched under the Trump administration, the trajectory of the national debt will not reverse course. It will continue to grow.
Elon Musk and other Trump backers have suggested that the 47th President take the reins of monetary policy to get borrowing costs down. While he can berate and badger the Federal Reserve chairman from the Oval Office, central bankers are ultimately uncontrollable and unaccountable.
They certainly cannot be counted on to deliver on their mandate of stable prices. That’s obvious given the inflation problem they let get out of hand in recent years.
Fed officials can be counted on to create more inflation regardless of who is President. Given the unprecedented budget deficit Donald Trump will inherit from Joe Biden, he will have to count on the Fed to support the Treasury bond market – possibly by reupping Quantitative Easing.
What all this means for investors is that the extreme optimism currently being reflected in the U.S. Dollar Index may be short-lived. On a fundamental basis, U.S. financial assets now appear to be extremely overvalued versus their foreign counterparts.
Still, the anticipation of a Trump presidency and the possibility of his policies coming to fruition can create a momentum of its own ahead of the reality – and the pushback to come out of Washington against his agenda.
It’s possible that gold’s correction may have further to go ahead of his inauguration. Gold had a massive rally in the months leading up to the election, so it may take a few weeks for it to establish a post-election zone of support and consolidation.
But there’s no reason to think precious metals markets won’t ultimately move higher in the years ahead as the buying power of fiat Federal Reserve notes inevitably goes down.
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