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Trump, Watergate and Gold

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Could Trump be facing his own Watergate?

The president’s firing of FBI director James Comey in the midst of probes into the administration’s possible connections with Russia set off a political firestorm. There has even been talk of impeachment in recent weeks.

While at this point, much of the rhetoric spinning around the Beltway is political in nature, the controversy surrounding the administration still spells trouble for Trump. Even if there is no fire burning underneath the smoke, political opponents will undoubtedly leverage the chaos to slow the administration’s agenda.

Head of commodities strategy at Saxo Bank A/S in Copenhagen Ole Hansen told Bloomberg that could mean a bad news for the dollar.

It’s a political dogfight. That does mean that his ability to act as a president, and to do what he’s promised, is sharply reduced and in that lies the risk of dollar weakness.”

Trump has struggled finding footing in the political arena since he took office. Republicans still haven’t come through on their promise to repeal and replace Obamacare.  And while the administration introduced an ambitious tax reform plan to much fanfare in April, little has happened since.

All of this has been good for gold. The uncertainty surrounding the administration, coupled with geopolitical conflicts, have driven safe-haven buying. As we’ve said before, the only certainty seems to be uncertainty. The Comey brouhaha has added to the chaos. As Bloomberg pointed out, “events over the last couple of weeks have spurred recollections of former President Nixon, who was ensnared in Watergate and resigned.”

One of the biggest impacts of Watergate was that it shattered faith in government. Polling shows just how much the scandal effected American’s perception of their government. The University of Michigan has conduced its National Election Study since 1958. One of the question is do you trust Washington “to do what is right.”

In 1972, before Watergate became the scandal of the decade, more than half of American adults gave the government very high marks, saying they could trust it all or most of the time, while 45% opted for the ‘only some of the time’ alternative. By 1974, high trust had dropped to 36% and has remained below 50% ever since.”

As analysis by Armstrong Economics shows, gold tends to rally when people lose confidence in government.

In our August 8th, 1994 edition of the Princeton World Report, we provided a study of gold dating back to 1721. Every major rally in gold was linked to a crisis in confidence centered around government. Such was the case during the Panics of 1864, 1869, 1893, 1907, 1929, 1974, 1980 and 1987. In each and every case, gold rallied when the full faith in government came into question. The extent of each rally was governed by the extent of concern in each situation. The Watergate scandal of the early ’70s was no exception. That scandal set off two trends as the story began to build in momentum. The bonds and stocks declined as gold rallied.”

Even if there is nothing to the allegations that Trump somehow colluded with Moscow, the political firestorm has certainly eroded faith in his administrations’ ability to get things done. In many ways, perception is reality. It seems unlikely his political opponents will take off the pressure off any time soon. We can expect more hearings, more investigations, more inflammatory Tweets, and more controversy.

If history is any indication, all of this looks pretty good for gold.

Photo by Gage Skidmore via Flickr

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