Why it’s time to revisit the Trump trade

Thursday, 17 August 2017
Melbourne, Australia
By Bernd Struben

  • It looked promising…until it wasn’t
  • Advantage gold
  • How much insurance do you have?

Do you remember the original Trump trade?

In the final weeks of the US presidential election campaign it became apparent that Donald Trump had a real chance of beating Hilary Clinton. An outcome the polls had long dismissed.

Trump, a political outsider, shot from the hip. He freely spoke, and tweeted, his thoughts…whatever they may be.

Those included tough words on renegotiating trade deals with Canada, Mexico, the EU…and pretty much every other nation on Earth. Not to mention banning Muslim immigrants, and building an impenetrable wall along the Mexican border.

He reserved some of his harshest rhetoric for the long-running US trade imbalance with China. Among other things, he labelled the nation a currency manipulator.

Markets generally sell off in times of uncertainty. Gold, on the other hand, tends to do well.

The Trump trade then, as you may recall, was to sell stocks and buy gold ahead of the election. If Trump won, that trade was meant to secure some handsome gains.

How did that work out? Not so well.

More after the markets…

Markets

Overnight, the Dow Jones Industrial Average gained 25.88 points, or 0.12%.

The S&P 500 gained 3.50 points, or 0.14%.

In Europe, the Euro Stoxx 50 index closed up 22.66 points, or 0.65%. Meanwhile, the FTSE 100 gained 0.67%, and Germany’s DAX index gained 0.71%.

In Asian markets, Japan’s Nikkei 225 index is down 17.03 points, or 0.09%. China’s CSI 300 is up 0.33%.

In Australia, the S&P/ASX 200 is down 16.20 points, or 0.28%.

On the commodities markets, West Texas Intermediate crude oil is US$46.89 per barrel. Brent crude is US$50.44 per barrel.

Gold is trading for US$1,288.47 (AU$1,622.96) per troy ounce. Silver is US$17.16 (AU$21.62) per troy ounce.

One bitcoin is worth US$4,408.14.

The Aussie dollar is worth 79.39 US cents.

It looked promising…until it wasn’t

As mentioned above, the original Trump trade was a fizzer.

It looked promising until four days before the 8 November election. And proponents maintained that if Trump won, the trade would pan out.

In the chart of S&P 500 below, you can see why they had reason to be confident.



chart image

Source: Google Finance
Click to enlarge


The S&P 500 index fell 3.1% from 24 October to 4 November. Gold moved the other way, from US$1,262.20 per ounce to US$1,303.30, a gain of 3.3%.

Then something strange happened. At least for those of us who thought Trump’s unpredictable nature would spook investors out of stocks and into the perceived safety of gold.

Trump’s promises of sweeping tax reform and a US$1 trillion infrastructure package got investors excited. Here was a true a businessman. A Washington outsider, not afraid to bust some heads to get the US economy back to full steam.

Sure, he might utter a few alarming statements. But certainly he wouldn’t follow through on them. Right?

In the chart of the S&P 500 below, you can see the result of the post-election investor exuberance.



chart image

Source: Google Finance
Click to enlarge


The index is currently up 18.4% since the 4 November dip, which you can see on the left side of the chart.

Gold, on the other hand, plunged in the weeks following Trump’s upset victory. The yellow metal fell to a low of US$1,128.80 per ounce on 23 December. That was a loss of 13.6% from 4 November.

Since then, however, gold has managed to claw back most of its losses. As you can see in the following chart, today its only down 1.2% from its 4 November price.



chart image

Source: Goldprice.org
Click to enlarge


So, if the first Trump trade was a flop, why revisit it now?

The reason is simple. The original premise remains sound. Trump is still highly likely to disrupt investor confidence and impact global commerce. That should see stock markets take a tumble while gold — and the best gold mining stocks — surge.

Advantage gold

To date, Trump has been stymied on all his major initiatives. Healthcare reform, tax reform, immigration reform…you name it. And the US$1 trillion in infrastructure spending that got investors so excited?

Nothing on that front yet, either.

He continues, however, to trumpet his ‘America first’ policy. In line with that, trade ructions with China — the world’s second largest economy, and Australia’s largest trading partner — could easily boil over into an all-out trade war.

Trump’s latest target is China’s alleged theft of US intellectual property. Theft that could be costing America as much as US$600 billion per year. Trump has now asked his administration to consider investigating the matter under Section 301 of the 1974 Trade Act.

From Bloomberg:

U.S. President Donald Trump asked his top trade official to consider investigating China over how it handles intellectual property, adding to the list of trade irritants between the world’s two biggest economies as they work to contain North Korea…

If China is found to be flouting the rules on U.S. intellectual property, the administration has a range of options, including imposing import tariffs, according to administration officials, who spoke to reporters Saturday on the condition of anonymity…

Earlier this year, a commission on U.S. intellectual property estimated that the annual cost to the U.S. economy in counterfeit goods, pirated software, and theft of trade secrets from all sources exceeds $225 billion and could be as high as $600 billion. China is the world’s principal IP infringer, the commission said.’

In a separate article, Bloomberg reports,

Invoking it [Section 301 of the 1974 Trade Act] wouldn’t do much to change China’s behavior. But it could very well undermine the global system of trade.

It would also lead to retaliation. China has already threatened to impede U.S. soybean imports, which totaled some $14 billion last year. It could also target cars, aircraft and other products, while generally making life difficult for American companies doing business there. Such a dispute would needlessly raise prices, reduce growth, harm exporters and jeopardize American jobs.’

It goes without saying that if the US and China engage in tit for tat tariffs and import restrictions, Australia isn’t going to walk away unscathed. The ASX would likely follow US markets down. And Aussie investor interest in gold should also peak.

Even taking the looming trade war out of the picture, Russia’s second-largest lender, VTB Group, predicts a bright future for gold. Also from Bloomberg:

Gold prices are set to jump to a four-year high of $1,400 an ounce by the end of the year over mounting tensions between North Korea and the U.S., and surging demand in the world’s biggest consumers, according to the head of precious metals at a Russian investment bank.

Bullion could rise to $1,360 within three months before climbing higher, fueled by global political risks and buying from China and India, said Evgeny Ananiev at VTB Capital JSC, the investment-banking unit of Russia’s second-largest lender VTB Group.’

The article included the following graph. It shows how gold (white line) has outperformed the broader commodity index (blue line) since the start of this year.



chart image

Source: Bloomberg
Click to enlarge


It may take some time to play out. But as I’ve written to you before, investors ignore Trump’s rhetoric at their own risk. He’s followed through — or at least attempted to — on almost everything he’s said since taking office.

Though his domestic policies have gotten hung up in Congress, he has greater freedom to pursue his agendas on an international level. And China clearly remains in his crosshairs.

When the trade dispute starts to truly heat up, gold miners should offer some of the biggest potential gains. Remember, gold miners are leveraged to the price of gold. And if gold soars to US$1,400 and beyond, the best gold miners could see their share prices double…or more.

Don’t wait for the herd to pile in before getting into some of the most promising gold stocks. You can find out all about them right here.

How much insurance do you have?

Yesterday Jason McIntosh, the editor of Quant Trader, explained why buying stocks trading at new highs can often be a successful strategy.

Today he explains how his ‘System Q’ can work to profit from falling share prices as well. Here’s the mail I got from him this afternoon.

I did a stocktake recently. It turns out my family has nine insurance policies.

Our insurance covers everything from home to business…life to health. There’s something for everyone.

Now, this level of cover doesn’t come cheap. The total cost is thousands of dollars annually.

Some would say this is over the top. They’d argue the odds of the sky falling in are low.

And they would be right. The worst outcome rarely happens.

But sometimes the longshot gets up. This is when insurance pays its way.

As you know Bernd, Quant Trader has two inbuilt insurance mechanisms:

The first is the exit stop. Think of this as basic cover. It gets you out when a stock falls. The money you lose is effectively your insurance excess. 

The next level of cover is more exotic…and it isn’t for everyone. This is short selling. The aim is to make money when the market falls. This should act as a buffer for losses on long trades.

Here’s an example…



chart image

Source: Quant Trader
Click to enlarge


You’ll be familiar with this company. It’s the once high-flying law firm Slater & Gordon [ASX:SGH]. Quant Trader gave a signal to short SGH on 30 June 2015.

Now, think back to mid-2015. The All Ordinaries was in the early stages of a 10-month decline. Most portfolios were losing money. That’s what you would expect in a bear market.

But imagine having a few short trades like SGH. While your regular long trades are declining, your short trades are making money. That’s the beauty of this type of insurance.

Here’s another example…



chart image

Source: Quant Trader
Click to enlarge


Dick Smith Holdings Ltd [ASX:DSH] was a disaster for many. The stock lost 100% of its value.

But not if you were trading the short side.

‘Quant Trader gave a signal to sell DSH on 19 August 2015. This was just after the shares began to turn lower. The system then rode the shares all the way to the bottom.  

Now, I want to make one thing clear. Quant Trader isn’t a standalone short selling strategy. The system makes most of its profit through buying shares. This is typical of most systems.

You see, short selling has a natural limit — a stock can’t fall by more than 100%. A stock you buy doesn’t have this restriction. It can go on rising indefinitely.

Short selling does best during big downturns. This is when most portfolios are vulnerable. A systematic strategy to short weak stocks can help smooth volatility.  

There’s one more point I want to make. If someone wants to use short selling, I always suggest selling a selection of stocks. This increase the odds of getting a few trades like SGH and DSH.

Rising market. Falling market. Jason McIntosh’s Quant Trader has a proven way to play both successfully. If you haven’t looked into Jason’s system yet, you can do so here.

Cheers,
Bernd