Dollar Can Still Run Another 25% on Trump Presidency, Gold Could Fall Further - Analyst

November 14, 2016 3:44 PM EST

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A Donald Trump presidency so far has meant a strong dollar and weak gold. This is expected to continue, according to Bretton Woods Research. The macro-focused research firm said while gold has fallen 5% since it was clear that Trump would win on election night, it is not clear that the precious metal has stabilized.

Meanwhile, the key aspects of Trump's pro-growth agenda – reducing taxes, slashing regulations and eschewing interventionist foreign policy - contribute to a strong dollar that could force the Fed to respond with new money supply.

The group warns, however, that the Trump administration needs to be mindful that the surge in the dollar demand does not overwhelm the upside seen ahead for the economy and equities. Excessive strength could be anti-growth, classic economics argues.

They believe it is possible that the dollar could appreciate by 25% during the next 1-2 years. Meanwhile, for gold, a decline of 25% from its recent high of $1340 in late September would equate to $1005/oz. They conservatively estimate gold will fall to $1150 within the next 6 months.

Other risks are the threat of runaway rate hike expectations. Markets could get the impression that Yellen’s "slow and gradual" pace of normalization may accelerate amid the Fed's Open Mouth operations and Trump team comments. The group disagrees with any form of monetary tightening before pro-growth legislation has been enacted. They also note that a lot of changes could be coming to the Fed composition, with Trump having the opportunity to replace as many as five members on the Fed’s Board of Governors, including Chairman Yellen, over the next one and a half years.

Trump Pro-Growth fiscal stimulus is seen as positive for equities, dollar forex, and industrical commodities (oil, natural gas, nickel) and negative for fixed income and precious metals. Sector that benefit include energy, financial, infrastructure, pharmaceuticals, and restaurants. Sectors to underweight are hospitality, railroads and agriculture.

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