Trump, Gold and the Cognac Effect

BGASC Metals
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Posted: Jan 18, 2017 12:01 AM
Trump, Gold and the Cognac Effect

The election of Donald Trump this past November promises to bring changes to Washington and the United States. As Donald Trump filled out his cabinet we began to get a sense of his priorities. Aside from immigration and health care reform, Mr. Trump appears to be focused on bringing back manufacturing jobs and wealth to America.

The Trump administration will be shaped by his policies, tone and the uncertainty they will engender. If Mr. Trump is successful in executing his plan, a new era of conspicuous consumption may emerge, especially in luxury goods. They may also have investors scrambling for safe haven assets like gold and silver.

Additional consumer spending driven by tax cuts and wage increases could boom in luxury goods and create price inflation that would, with the addition of the uncertainty created by Mr. Trump’s mercurial personality, in turn boost the demand for gold and its price.

The Trump Policies

Manufacturing

Mr. Trump has already been at work in either convincing U.S. companies to keep their manufacturing plants in the United States (Carrier) or to expand their domestic manufacturing capacity (Ford). The president-elect is also in discussions to lure foreign companies to invest in (Softbank) or increase manufacturing capabilities in the United States (LVMH). The Chief Executive Officer of French luxury conglomerate LVMH and maker of Hennessy Cognac, Christian Dior, Givenchy and Guerlain perfumes, Louis Vuitton and Fendi leather goods, met in early January with the President-elect to discuss his U.S. manufacturing plans.

Infrastructure Spending

On the campaign trail, Donald Trump talked about the need to rebuild the United States’ aging airports, bridges and tunnels. The president-elect also promised to build a wall along the Mexican border with the United States.

The president-elect also spoke about the need to make America richer as part of his overall campaign theme of making America great again. After eight years of massive monetary stimulus that involved $4.5 trillion in quantitative easing and zero interest rates, courtesy of the Federal Reserve, Mr. Trump’s policies are expected to favor a heavy dose of fiscal stimulus that will help fund infrastructure rebuilding.

While the unemployment rate over the past eight years fell steadily, wage growth remained stagnant. The creation of tens of thousands of high paying construction and manufacturing jobs may cause wage inflation which in turn may lead to a spending boom. Increased government spending outside a financial crisis may be recipe for higher consumption and inflation, hence the term “trumpflation” that has been bandied about by the financial media.

Tax Cuts for Individuals and Corporations

President Trump has promised tax cuts for individuals and corporations. Tax cuts generally translate into increased consumer and corporate spending, which in turn can create price inflation. Mr. Trump has also promised to allow U.S. foreign corporations to repatriate their overseas cash at lower rates. If this is achieved, corporations will have more capital to invest in the United States, which could be used to create more jobs. More higher paying jobs may strain the labor market and push wages and price inflation higher.

The Trump Tone

As important and perhaps more important than a president’s policies is the tone he sets. A president is judged not only by the policies he enacts but the tone he sets. Donald Trump’s glitzy persona will help set a new tone. Mr. Trump’s style and taste features ostentation. The glimmering gold Trump Towers, the 24k gold infused windows at the Trump International Hotel in Las Vegas, the golden elevators of Trump Tower in New York City and his elegant Mar-a-Lago retreat in Florida speak of wealth on display; a style many wealthy (and not so wealthy) Americans may wish to emulate by spending on luxury items.

The Cognac Effect

If Mr. Trump succeeds in creating a wealthier America, that will be good news for luxury good providers. In 2016, cognac sales hit a record, led by an increase in sales in the United States, the world’s largest consumer of the amber liquid.

The prospect that wealthy Americans may soon have more discretionary cash due to Trump’s tax cuts is not lost on Remy Martin’s Chief Executive Officer Valerie Chapoulaud-Floquet. Remy Martin caters to the luxury market with its upscale cognacs. Ms Chapoulaud Floquet noted that affluent households would benefit from Trump’s proposed tax cuts. She added, “In the luxury world, for the time being, what’s being said is that what could happen will be favorable."

Gold sales in the United States in 2016 hit their highest levels since 2010. Global financial uncertainty created by Brexit and the election of Donald Trump have been cited as reasons for the increase in gold sales.

The Trump Uncertainty

It is uncertain that Trump will be successful in creating a wealthier America. It is almost certain, however, that a Trump presidency will cause a considerable amount of uncertainty that should help boost the price of gold. From tweetstorms to rocky press conferences (“CNN- You are Fake News”) to potential changes in policies and relationships with NATO, the EU, Great Britain, China, Russia, Syria, Iran, Israel and Mexico, a Trump presidency promises plenty of surprises.