Yesterday, Trump published his proposed budget for 2018. What does it imply for the gold market?
President delivered a proposal for budget for the 2018 fiscal year entitled “A New Foundation For American Greatness”. The key takeaway is that the budget plan implies $3.6 trillion in spending cuts over the next decade. Say what you want, but it does not look like huge fiscal stimulus. On the contrary, Trump wants to balance the budget within 10 years. To achieve this ambitious goal, the new administration assumes large spending cuts in social safety net programs, such as Medicaid. Economically it might have sense, but the markets expected fiscal stimulus. This is bad news for the Trump rally, but good for the gold market.
However, it assumes $1 trillion support for infrastructure investment, a $52 billion hike in military spending, and a $2.6 billion investment in high-priority tactical infrastructure and border security technology, including funding to plan, design, and construct a physical wall along the border with Mexico.
The main problem with the plan is that it relies on rosy assumptions, like forecasts for economic growth of 3 percent a year by the end of Trump’s first term, much higher than the 1.9 percent assumed by the Congressional Budget Office. To make matters worse, it double counts up to $2.1 trillion in revenue, a huge accounting error… or a deliberate attempt to disguise the true fiscal implications of Trump’s agenda. Hence, the President’s proposals are unlikely to be implemented, at least in the current form. Therefore, the budget proposal might be disappointing for the financial markets, but positive for gold.
The bottom line is that Trump provided his budget plan for 2018 and his priorities for the next decade. As with his previous versions of the budget plan, it’s a proposal which is unlikely to become law. As a disappointment for the financial markets, it could provide additional support for gold prices in the long term. However, there was a corrective pullback in the gold market from recent gains yesterday – as we predicted, the terror bombing attack in the U.K. did not provide a boost to gold. Will Trump do it? Time will tell; stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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