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In a Massive Shock, Trump Wins
– Sending Stocks and Gold in Opposite Directions:
The drama escalated early Tuesday night when the New York Times forecast a 90% chance that Donald Trump would be our next President. Gold shot up $50 in two hours, from $1,270 to $1,320, and then up to $1,335 at midnight. Stock market futures tanked at the same time, falling more than 800 Dow points.
The next morning, as the election outcome was confirmed, these two key markets reversed, moving in the direction. Gold lost most of its overnight gains, closing at $1,279, while the Dow Jones Industrial average reached a new all-time high of 18,590, up 257 points. After this series of reversals, investors are naturally asking: Why a quick reversal of sentiment with no change over the outcome, and: What’s next?
The major key to the future will be how President Trump handles his success. If he is able to work with both the Republican majority in Congress, while inviting the minority Democrats to participate in policy development, he may be able to revive American business earnings and our slow-rising economic GDP.
The First Republican Monopoly of Power since 2002-2006
With a clear majority in the House and a narrow majority in the Senate, 2017 will be the first year since 2006 that the Republicans control both Houses of Congress and the White House. Here are the basic facts:
- In the election of November 5, 2002, the Senate went from being balanced (50-50) to a narrow (51-48) Republican majority. The Republicans also gained 15 House seats for a 229-205 lead.
- In the election of November 2, 2004, Republican George W. Bush was re-elected, while the Republican’s Senate advantage rose to 55-44 and their House edge expanded to 232 to 202.
- In the election of November 7, 2006, Democrats gained control of Congress, flipping the numbers – 233 Democrats to 202 Republicans in the House. The Senate was split 50-50, so the Republican monopoly on the White House and Congress lasted four years, from the 2002 to 2006 elections.
How did gold and the stock market perform in the four years when the Republicans were in full control?
Election Date Gold Price Dow Jones Index
November 5, 2002 $318.50 8,586.24
November 7, 2006 $625.75 12,156.77
Four-year Gain: +96.5% +41.6%
When the Republicans gained control in 2003, they immediately went about cutting the top tax rates.
President Bush’s “Jobs & Growth Tax Relief Reconciliation Act of 2003,” passed into law on May 28, 2003, reduced the top tax rate to 35%, while sharply cutting long-term capital gains and dividend taxes. The resulting prosperity engendered rising tax collections, causing the federal deficit to shrink each year.
The 2003 tax cut was called a “tax cut for the rich” and a “budget-busting” move that would blow up the budget deficit out of all proportion. But the opposite happened. Millions of poor were taken off the tax rolls altogether while the rich paid a greater percentage of taxes collected, and the budget deficit declined:
Year Federal Deficit (billions)
Source: Congressional Budget Office (CBO) U.S. Office of Management and Budget
The Last Time the Fed Raised Rates, Gold and Stocks Both Continued to Rise
Throughout 2016, the main subject of economic debate – outside of the controversial election cycle – has been the endless question of “Will the Fed raise rates this time – or the next time – they meet?” So far, the Fed has only raised rates once, by 0.25% last December. But from 2004 to 2006, the Fed raised rates at 17 consecutive FOMC meetings, but their action barely slowed the rising gold and stock markets.
In the summer of 2004, the Fed started raising interest rates. In less than two years, the Fed Funds rate escalated from 1.0% to 5.25%, yet (1) the stock market kept rising, (2) the U.S. dollar kept falling and (3) gold kept rising. Here’s a chart of the steady rise from 1.0% to 5.25% in a two-year period, 2004-2006.
Now, let’s combine these two ideas – a tax cut by the Republic monopoly in Washington DC in the midst of 17 rate increases at the Federal Reserve. During that time, gold and the stock market both soared:
Year Fed Funds Rate* S&P 500 Change Gold’s Average Price Gain
2003 1.13% +26.38% $363.38 +17.3%
2004 1.35% +8.99% $409.72 +12.8%
2005 3.22% +3.00% $444.74 +8.5%
2006 4.97% +13.62% $603.46 +35.7%
2007 5.02% +3.53% $695.39 +15.2%
*Average for the full calendar year
Source: Federal Reserve (for Fed Funds Rate); Yahoo! Finance (for the S&P 500); Kitco.com for gold
The Fed was slow to raise rates at first, since 2003-04 was called a “jobless recovery” (sound familiar?), but once the unemployment rate fell to 5.5% in the summer of 2004, the Fed felt comfortable enough with the recovery to start raising rates fairly rapidly, by roughly half a point every three months.
Fed Funds Benchmarks, 2004-06
1.0% on June 22, 2004
2.0% on November 22, 2004
3.0% on May 12, 2005
4.0% on October 31, 2005
5.0% on May 12, 2006
5.25% on June 30, 2006
Source: New York Federal Reserve Bank
Bottom line, there is no logical reason to fear the next rate-hike cycle by the Federal Reserve, if the economy is booming once again. Both stocks and gold can rise in such a scenario.
Economic Policies Matter: Gold Tends to Rise When People “Feel Rich”
The old gold-buying mantra is based on fear – fear of inflation or deflation, a weak (or strong) dollar, an international incident, a Brexit-style break-up of the EU or any of the wildest fantasies of the gloom-and-doom crowd. Gold is a “disaster hedge” for sure, but gold is also what you might call a prosperity hedge.
Investors around the world buy gold when they have enough disposable income to afford it. That is why India and China are the main centers for physical gold demand. India and China have grown massively richer over the last three decades. Putting away 30% or more of one’s income in savings is traditional in many Asian cultures. Millions of poor rural families in India can now afford gold for their daughter’s wedding. Formerly-poor farmers in China have migrated to the cities for better-paying work and can now afford to switch part of their huge savings pool to gold. The same is true in the U.S. When favorable tax policies and a rising level of household wealth create prosperity, more families can afford to buy gold.
We at Navellier Gold do not advise investors to “sell stocks” to buy gold, since we see gold as a relatively small part of a balanced portfolio. We see gold as an alternative to cash in the bank, foreign currencies or low-yield bonds. Gold is a cash alternative that is likely to deliver far more growth than cash can deliver.
Gold is likely to rise in the next four years – despite world events and crises erupting almost daily. If the policies of the Republican majority in Congress and the new man in the White House encourage growth and prosperity, rather than punishing the wealthy with confiscatory taxes, prosperity and hope can revive over the next few years. It’s too early to say for sure, but the Trump White House and Republican Congress will likely cut back on anti-business regulation, cutting the super-high (35%) corporate tax rate, bringing trillions of expatriate dollars home, creating wealth and jobs here at home, which in turn will help create a rising stock market and a continued bull market in gold over the next two or more years.