Volatility in commodities has been high in the wake of Donald Trump’s presidential election victory, but as the initial shock wears off, a more clear picture of what his presidency means for gold, oil and industrial commodities has emerged.
Already, Trump’s proposed plan to improve the U.S. infrastructure has helped to fuel expectations of higher demand for industrial commodities, such as copper, which has seen prices rise nearly 4% since election day on Nov. 8.
“We’re way behind in infrastructure updates and refurbishing,” Frank Holmes, chief executive and chief investment officer at U.S. Global Investors told MarketWatch in a recent interview. “A lot of money could go into upgrading our infrastructure and industrial [commodities] will benefit from that.”
But Trump’s call for hefty tariffs on Chinese imports and his threat to place trade sanctions on China for its currency policy could lead to “massive inflation in America,” which could boost gold demand but hurt oil consumption, said Holmes, who’s a well-known fund manager and a natural-resources and emerging-markets expert. The San Antonio-based boutique investment firm had $946 million in assets under management as of Sept. 30.
Trump has been “very critical of international trade deals, threatening to pull out of Nafta (the North American Free Trade Agreement) and levy huge tariffs on Chinese-made goods,” said Holmes. “This could lead to another inflationary period…and could trigger another recession, all of which would be constructive for the price of gold.”
Gold prices were generally expected to climb if Trump won the election because of the amount of uncertainty surrounding his policies and impact on the economy, but prices have instead fallen by more than 5% since the outcome of the election.
Before election day, Holmes didn’t think gold was going to collapse, but he also “didn’t think it was going to take off” when the outcome was known.
It wasn’t about who won the election, as much as it was about the winner’s “economic policies that [would] drive the price of gold,” he said.
If Trump follows through on his proposal of sanctions on China, that would lead to substantial consumer inflation in the U.S., said Holmes.
Higher inflation should keep real interest rates low and that tends to support gold prices.
Still, Holmes said that gold trading is likely to be “sloppy” until the December Federal Reserve meeting, during which the central bank is expected to raise interest rates, and until the current carry trade has been unwound.
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In a carry trade strategy, investors borrow money at a low interest rate and use the money to invest in an asset that’s expected to provide a higher return.
“That money, when it’s borrowed, [is] always in short-term investments, like gold and emerging-market currencies,” Holmes said.
So short term, gold will probably “be challenged.” Then, going into next year, some of Trump’s policies will likely prove inflationary, he said. “If we get back to negative interest rates, which I think will happen, we’ll see gold rebound to $1,300” an ounce.
Gold futures fell toward $1,200 an ounce on Friday to their lowest level since February.
Meanwhile, Trump’s calls for U.S. energy independence is expected to lead to a climb in domestic oil production in a market that’s already oversupplied.
Still, the outlook for energy is murkier than the outlook for gold, he said.
“We know that Trump is a huge proponent of fossil fuels, having expressed deep skepticism of the efficacy of renewables on multiple occasions,” he said. “But it’s unclear at this point what policy steps he might take to bring back coal mining jobs, as he’s promised, or support oil prices.”
Trump is likely to support “fracking,” Holmes said. Hydraulic fracturing involves using a mix of water, sand, and other additives to coax oil and gas from dense rock formations.
And, with the U.S. now able to export surplus oil, these factors are “going to be a force that puts a lid on the price of oil surging above $50 a barrel for long,” said Holmes.
On Friday, West Texas Intermediate crude-oil futures fell, but traded higher for the week, after a three straight weeks of declines.
Trump’s push toward energy independence would also be a push away from American dependence on oil from the Organization of the Petroleum Exporting Countries.
OPEC, meanwhile, likely doesn’t have the “discipline” to to follow through on its plans to cut output, said Holmes.
The 14-member group of oil producers is expected to complete a plan to target member output of 32.5 million to 33 million barrels a day at a meeting on Nov. 30.
“Do you think that they can really cut back supply and not cheat?” Holmes said. “That’s a big issue.”
If OPEC manages to cut back supplies, prices may run up to $50, but “cheating” among members may set in—and if prices runs toward $60, “technology in America will just turn on a dime,” he said, noting that the “big creator” of the oil glut is actually “American ingenuity” that has been able to find energy onshore at a much cheaper price.
All in all, Holmes sees oil capped at $50 a barrel, with the downside probably around $35—“and we’re going to fluctuate around” that range over the next year.
For the industrials sector, copper has been an obvious standout given Trump’s plan for infrastructure improvements. Prices for the metal gained nearly 11% for the week ended Nov. 11, following the election.
Holmes also sees potential in demand for nickel and zinc, which “look very, very strong with that industrial build out. Supply is not as big as people thought and the process for turning it on takes a lot longer.”
Taking a look at the big picture for the industrials space, however, he sees opportunity in the airline industry, which he referred to as the “cheapest category in the industrials” sector, trading three to five times cash flow.
U.S. Global Investors’ U.S. Global Jets exchange-traded fund whose components include global airline operators and manufacturers, saw its market value climb roughly 8.8% in the third quarter. Delta Air Lines Inc. is the top holding.
Holmes said Boeing Co. one of the ETF’s components, and Northrop Grumman Corp. will do well given the war on terrorism and plans to “refurbish and re-beef up our military and technology.”
All told, however, what Holmes said about Trump’s plans for the energy sector appear to hold true for just about every other sector, including industrials: “We will have to wait and see how things unfold—nothing is certain.”