In early 2016, physical gold hit $1,050 an ounce, which marked a level that gold investors hadn't seen since the latter half of 2009. After hitting $1,900 an ounce in 2011, gold shed 45% of its value as the U.S. economy improved, the U.S. dollar strengthened, and the Federal Reserve teased at, and finally began, raising its benchmark federal funds rate.
However, gold found new life in at least the first half of 2016. The Fed dashed expectations that it would hike interest rates four times in 2016, and U.S. economic growth didn't live up to the hype. At one point during the year, physical gold was up more than 30%, and it wound up logging its best first-quarter performance in 30 years.
The second half of the year wasn't as pretty. Gold shed most of its gains following the election of Donald Trump, whom many investors viewed as a good candidate to boost inflation and GDP (gross domestic product) growth, and lead to interest-rate hikes. The lustrous yellow metal's recent low came in late December at $1,126 an ounce.
Did Trump just signal a new bull market for gold?
But gold has begun 2017 with the same flair it vaulted out of the gate with in 2016. At last check, gold had reestablished itself firmly above $1,210 an ounce. While some profit-taking in the bond market and U.S. dollar trade (the dollar hit a 14-year high recently) could be the reason behind the latest surge, it's Trump himself who could wind up fueling the next bull market in gold.
In an interview with The Wall Street Journal on Monday, Donald Trump uttered two words essentially never spoken by a president when describing the state of the U.S. dollar: "too strong." In describing how the U.S. is losing ground to China, Trump commented: "Our companies can't compete with them now because our currency is too strong. And it's killing us." It's incredibly rare for an American president to comment on the movement of the U.S. dollar, let alone advocate that it should fall.
The movement of the dollar has a double-edged-sword effect on consumers. A stronger dollar, like we're experiencing now, gives U.S. consumers more buying power in overseas markets, and makes it less expensive for domestic businesses to import goods. On the other hand, a strong dollar makes U.S. exports less appealing to other countries where currencies have taken a beating, and can thus boost our national trade deficit and eventually slow growth.
The dollar also happens to have an inverse relationship with gold. A stronger dollar often means weaker gold prices, whereas a weaker dollar leads to stronger gold prices. Trump's implying that the dollar is too strong might as well be a ringing endorsement for gold.
Trump's policies work against his belief on the dollar
Yet what's interesting is that many of Trump's proposed tax and growth policies would work to increase the value of the dollar, not devalue it.
For example, Trump has proposed completely reworking the U.S. tax code for individuals and corporations. In particular, he wants to simplify the individual tax schedule from seven brackets, ranging from a 10% tax to a peak of 39.6%, to a three-bracket system with ordinary income tax rates of 12%, 25%, and 33%. Corporate income tax rates would also be sliced to 15% from 35%, and U.S. multinationals would be afforded the opportunity to repatriate cash being held in overseas countries at a special tax rate of 10%. Altogether, this extra income in the pockets of businesses and consumers is expected to boost consumption and overall U.S. GDP, pushing inflation and the dollar higher.
By a similar token, Trump has proposed an infrastructure-spending package with roughly $1 trillion spread out over the next decade to help replace some of America's worn-out roads and bridges. Such aggressive spending is likely to have a positive impact on the U.S. dollar, as it would be conducive to growth in the U.S. GDP.
In other words, Trump's desire to see the U.S. become more competitive in exports by devaluing the dollar would probably work in opposition to his tax and infrastructure proposals. This is leading some pundits to second-guess how aggressive he could be in the early part of his presidency about passing tax reforms or an infrastructure bill.
A green light for gold stocks
Though there will always be reasons to suggest that gold could head lower, Trump's comments speak volumes about his desire to create a weak-dollar environment. In my view, gold has more potential upside than downside at this point.
But it isn't just that physical gold could head higher. Gold stocks have witnessed a dramatic turnaround thanks to prudent capital management and cost-cutting, which have led many mining companies to dramatically lower their all-in sustaining costs (AISC). Because gold companies have the flexibility to deploy capital, and can even return that capital via share buybacks and dividends to shareholders, individual gold stocks are probably a smarter way to play a bull market in gold than owning physical gold during Trump's presidency.
One of the prime beneficiaries would be Royal Gold (NASDAQ:RGLD), a royalty and streaming company in the gold space. Royal Gold isn't involved in the costly day-to-day activities of producing precious metals. Instead, it supplies large sums of capital upfront to mining companies that are looking to develop or expand mines, in exchange for long-term or life-of-mine contracts that guarantee Royal Gold a below-market rate on delivered product. For instance, in Royal Gold's most recent quarter, its gold-stream AISC was just $352 per ounce. This implies that Royal Gold would have more immediate impact on its margin from an increase in spot-gold prices than any other gold stock, and that it would take a monumental collapse in gold prices to push Royal Gold into the red. As an added bonus, shareholders are currently receiving a 1.4% dividend yield.
Goldcorp (NYSE:GG) is another standout gold miner that's historically kept its costs below the industry average. Recently, Goldcorp initiated a cost-saving platform to reduce costs by $250 million internally, which also has the effect of making its mining operations more efficient. Goldcorp's flagship Penasquito mine in Mexico, which is rich with byproducts such as copper, lead, and zinc, helps push down its gold-equivalent AISC and keeps the company highly competitive on a cost basis with its peers.
Though the ride could be bumpy at times for gold investors, with Donald Trump as president, the future looks bright for the lustrous yellow metal and its underlying gold-mining stocks.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.