Mining ETFs Could Be Huge Under a Trump Presidency
As always, there are winners and losers when a new president moves into 1600 Pennsylvania Ave., and the 2016 U.S. presidential elections should prove no different.
Exhibit A are commodities, especially gold and copper. Some Wall Street observers say that Trump's push for up to $1 trillion could lead to a boom in commodities, especially copper, iron, and steel, as builders will need heavy metals resources to rebuild roads, bridges, and buildings in an infrastructure renaissance.
Gold, though, faces significant headwinds as it comes off six consecutive weeks of negative performance in November and December.
[See: 9 Ways to Invest in a Post-Election Market.]
As always on Wall Street, there are myriad factors in play when it comes to speculating on commodities.
"With so many unknowns still surrounding what policies the incoming Trump administration will pursue, there are two factors we're watching closely -- increased infrastructure spending and higher interest rates," says Joseph Yaffe, co-founder of Gainesville Coins in Gainesville, Florida.
Yaffe says the impact on mining and commodities will likely be mixed.
"Fiscal stimulus would stoke demand for raw materials and metals if Congress and the new president indeed agree on a trillion-dollar infrastructure package," he says. "Such a spending plan is probably the most popular and attainable of all of Trump's proposals thus far."
The Federal Reserve has also suggested that it will normalize interest rates at a faster pace in 2017, well beyond the single 25-basis-point rate increases seen in each of the past two years, Yaffe says.
"While monetary policy is largely outside of the scope of the chief executive's powers, higher rates will almost certainly be a feature of a Trump presidency nonetheless," he says. "The higher inflation we can expect from rising interest rates and more government spending is generally bullish for commodities and mining firms. However, silver and gold are a special case within the sector, particularly the latter. Higher rates suppress investment demand for gold relative to other yield-bearing assets, which would place downward pressure on gold prices."
Others agree.
"Depending on the speed in which Trump's pro-growth rhetoric can, or will, translate to real policy, we think gold, silver and mining stocks will most certainly be impacted," says Lara Magnusen, portfolio manager at the California-based Altegris Multi-Strategy Alternative Fund.
Magnusen says higher interest rates and a stronger dollar will be the largest harbinger for mining stocks, in particular, as investors "may see greater upside" in domestic equities.
"The exception could be base metals, like copper, should domestic spending ramp up and the industrial use of copper accelerate," Magnusen says. "But industrial or base metals could benefit if infrastructure spending truly does accelerate."
Other commodities experts say Trump's anticipated policies consist of considerable fiscal stimulus and thus, appear to be highly inflationary, and that's not going to help precious metals prices.
"Despite a lack of detail surrounding any stimulus plan, the market has already discounted a bullish outcome," says Sprott Asset Management's Gold Team. "The bond market has sold off in anticipation of this as nominal yields have increased at a faster pace than inflation expectations, driving up real rates in the near term -- and that's a negative for gold."
As Trump takes office, and presumably pushes for massive infrastructure spending, it's important for commodities experts to separate gold from other metals, as it's more vulnerable to changing economic conditions.
[Read: 10 Commodities Investments to Rev Up Your Portfolio.]
"Gold and silver march to different drums," says Jeffery Born, professor of finance at the D'Amore-McKim School of Business at Northeastern University in Boston. "Gold glitters most when fear and uncertainty are at their highest. The stock market has been decidedly bullish since Trump's election, suggesting that near-term recession fears are minimal."
Born does say that gold is used in electronics and other manufactured goods, so a Trump expansion "should help keep gold prices steady" regardless of market and economic uncertainties.
James Luke, metals fund manager at Schroders, is more bullish on gold, especially if investors pull back the lens and take a wider view of global economic conditions.
"With energy prices rising, the U.S. labor market tightening and building expectations of hawkish U.S. trade policy, inflation expectations could build rapidly, and that supports gold," Luke says.
Luke also say the potentially positive economic elements of a Trump presidency have been priced in by markets.
"The potentially negative elements, including higher inflation, higher geo-political risks and increased protectionism have been largely ignored," he adds. "Thus, gold remains an under-owned hedge against global central bank credibility and under-appreciated global risks. Potential inflation, currency and financial market outcomes globally are arguably more extreme now that at any point since the end of the Second World War."
Setting gold aside, copper seems to be the main metal play that gets a thumbs-up from commodities specialists.
"We see growth in copper," says Jay Jacobs, director of research at Global X Funds, in New York. "Copper should grow as it's needed for erecting new bridges, highways, and ports require goliath machines to do the job. And once completed, these new projects are likely to attract investments in new cars, trucks, trains, cargo ships, and airplanes, all of which use copper extensively."
Also, Jacobs says, "Should new infrastructure policies also focus on improving digital communications, copper is likely to see significant increases due to its prevalent use in wiring"
Overall, a Trump administration should translate into higher prices and stronger investment performance for metals, especially if a Trump administration gets the massive funding it seeks for major infrastructure projects.
[See: 8 Ways President Trump Will Affect Wall Street.]
That's no sure thing, though, so it's always a good idea to talk to a trusted financial advisor before going all in on gold and other commodities in the next year. Considering the risk involved, that's a talk you should have sooner rather than later.
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