Gold may just win US election
Gold bulls, hang on to your hats. Whether Donald Trump or Hillary Clinton becomes the next US president, gold could benefit.
Though many analysts believe Trump will provide more of a boost for bullion because his protectionist policies would weaken the US economy and the dollar, others warn the immediate outcome of the election is less relevant than the longer-term effect of the winning party’s policies.
Both Republicans and Democrats want to boost US growth by spending on infrastructure. If inflation results and erodes the value of other assets, investors will flee to gold.
If it results in a stronger US economy, gold loses appeal as a safe haven.
This year’s US presidential race has aroused more interest inside and outside the US than any previous contest, largely because it has focused more on personalities than on policies. Even before his headline-grabbing, frequently offensive comments, Trump was a well-known figure because of his property empire and years of hosting TV reality show The Apprentice.
Clinton was also a public figure, as the wife of former president Bill Clinton and as US secretary of state from 2009 to 2013.
NBC News/Wall Street Journal polls now put Clinton about nine points ahead of Trump, at 46% against his 37%. She gained in popularity after the second presidential debate, held on October 9, but Trump had already been losing support, including from his own Republican Party supporters, as a result of the release of a 2005 recorded conversation in which he boasted about groping women.
The consensus of polls after the first debate on September 26 was that Clinton made a better showing.
The reaction of gold after the debates has been inconclusive. After the first presidential debate, it fell to US$1,327/oz from $1,337/oz. In the 24 hours after the second debate, it added $3/oz to $1,259/oz.
But the immediate prospect of interest rate hikes is far more significant. The first week of October was gold’s worst week in over three years, as it shed about $80 on renewed expectations of a US interest rate hike before the end of the year.
In a widely cited report in July, ABN Amro analyst Georgette Boele said while a Trump win was unlikely, it would support the gold price because his policies would weaken the US economy. Trump’s victory would increase domestic and international uncertainty, which could push gold prices above $1,850/oz in coming years.
Boele considered that a Democrat victory was more likely, but said this would also support gold because the party’s policies would result in inflation outstripping economic growth, negative real interest rates and a weaker dollar.
“All in all, gold prices will likely rise at a moderate pace towards $1,650/oz over the coming years,” she said.
Citigroup said in a report last month that a Trump win would increase volatility in gold and currency markets. It forecast gold could be at $1,425/oz by the end of this year, including the possibility of a Trump win, which at the time seemed likely.
Meanwhile, Tony Cadle, fund manager at Ashburton Investments, says in the two years following the global financial crisis of 2008, governments used both monetary and fiscal stimuli to boost growth but, after 2009, fiscal consolidation occurred and only monetary stimulus was used. Eight years later it is questionable whether this has worked and countries including Japan, Canada and China have put in place new fiscal measures.
In the US, both candidates plan to introduce fiscal stimulus. Trump promises to cut corporate and personal tax rates significantly and increase government borrowing to fund infrastructure spending, while reducing spending on education, energy and health care.
Clinton intends to fund $275bn of infrastructure spending by increasing taxes.
Cadle says a global trend to increase infrastructure spending would support commodity demand and prices.
Asked how this would affect gold, Cadle said it was hard to call. It depended on forecasts of US GDP growth and the strength of the dollar.
“Should the current presidential candidates’ policy actions from 2017 result in a stable dollar and keep bond and cash yields at current low levels, the gold price should remain at current levels.
“However, should forecast fiscal stimulus measures cause US GDP growth to accelerate and result in the Fed Funds rate being increased more rapidly than present forecasts [due to inflation fears], the gold price could come under pressure and be sold off as the dollar would likely strengthen against global currencies.”