Hope for the Best but Prepare for the Worst (with Gold and Munis)

This week investors shrugged off even more drama coming out of Washington. Stocks continued to rally and hit record highs, even as former FBI director James Comey testified that, in his opinion, President Donald Trump fired him in an attempt to lift the “cloud” of the Russia investigation.

If true, this suggests obstruction of justice, an impeachable offense. And if impeached, or in the event of a resignation, Trump’s political agenda would obviously be derailed. The last (and only) time a U.S. president resigned, the Dow Jones Industrial Average lost up to 40 percent, as a recent article in TheStreet reminds us.

But markets paid no mind to Comey’s insinuations, underscoring investors’ confidence that tax reform and deregulation will proceed as planned. And sure enough, just hours after Comey testified, the House of Representatives voted to repeal key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has contributed to an alarming number of small bank closures since its passage in 2010.

So once again, the wisdom of crowds prevails. If you remember, markets were forecasting as far back ago as last summer that Trump would win the November election.

This doesn’t mean, however, that Trump’s problems are behind him.

This week I was speaking with Mike Ward, a top publisher with Agora Financial, who compared Presidents Trump and Ronald Reagan. It was suggested that, despite Trump’s apparent affection for the 40th president, he has so far failed to live up to the Great Communicator’s memory of optimism and deep respect for the office.

Whereas Reagan wanted to “tear down this wall,” Trump wants to “put up that wall.” Whereas Reagan insisted it was “morning in America,” Trump insists it’s “American carnage.” Reagan succeeded in building coalitions and unifying our allies against the Soviet Union. Trump has already managed to destabilize those alliances.

During the 1988 vice-presidential debate, Texas Senator Lloyd Bentsen famously ribbed then-Senator of Indiana Dan Quale for comparing himself favorably to John F. Kennedy. “I served with Jack Kennedy. I knew Jack Kennedy,” Bentsen said. “Senator, you’re no Jack Kennedy.”

Similarly, many observers are of the opinion that Trump is no Reagan.

Don’t get me wrong. I remain hopeful. President Trump wants to make America great again, and it’s still well within his power to do so—if he can practice some self-restraint and not get caught up in petty feuds. Voters support his vision. They gave him not only the Executive Branch but also Congress and most states’ governorships and legislatures.

You could say I’m hoping for the best but preparing for the worst. I advise investors to do the same. No one can say what the future holds, and it’s prudent to have a portion of your portfolio in gold, gold stocks and short-term, tax-free municipal bonds, all of which have a history of performing well in volatile times.

Gold Poised for a Breakout

Following bitcoin’s breathtaking ascent to fresh highs, gold rose to a seven-month high this week on safe-haven demand, stopping just short of the psychologically important $1,300 level. Supported by Fear Trade factors such as geopolitical turmoil—both in the U.S. and abroad—and low to negative government bond yields, gold’s move here can be seen as a bullish sign.

As others have pointed out, the yellow metal breached the downward trend of the past six years, possibly pointing to further gains.

gold just breached key resistenceclick to enlarge

Under pressure from a beleaguered White House and stalled policy reform, the U.S. dollar continued to sink this week, with gold outperforming the greenback for the first time since the November election. Because gold is priced in dollars, its value increases when the dollar contracts.

Gold out performs the US dollar for the first time since election

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It’s also important for investors to remember that gold has often rallied when Treasuries yielded little or nothing. Why would investors knowingly lock in guaranteed losses for the next two or five years, or near-zero returns for the next 10 years? That’s precisely what Treasuries are offering, as you can see below:

Low to negative real treasury yeilds support gold

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Minus inflation, the two-year Treasury yielded negative 0.96 percent in April; the five-year, negative 0.38 percent; and the 10-year, a paltry 0.10 percent. (I’m using April data since May inflation data won’t be available until next week, but I expect results to look the same.)

When this happens, investors tend to shift into other safe-haven assets, including municipal bonds and gold.

Year-to-date, the yellow metal is up more than 9.7 percent, even as the stock market extends its rally. This runs counter to what we’ve seen in the past. As I’ve explained before, gold usually has a low correlation to other assets, including stocks and bonds, which is why investors all around the globe favor it as a diversifier.

So what gives?