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Gold might be any port in a storm in a Trump universe

While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Opinion

Self-funded retirees with a penchant for gold stocks had been enjoying a stellar year. Up to late October, and on a back of a gold price that had risen nearly 40 per cent over the previous 12 months to peak at $US2,789 ($4,271) an ounce on October 30, the share prices of big gold producers has appreciated sharply.

Over this period the three gold stocks in the top ASX 200 index, Northern Star Resources (ASX:NST), Newmont Corp (ASX:NEM) and Evolution Mining (ASX:EVN) rose 45 per cent, 18 per cent and 31 per cent, respectively. The bonus was that they all came with a healthy dividend.

But that rally, in equity prices and physical gold, came to an abrupt halt on the cusp of the US presidential election with the growing likelihood of a Trump presidency being a factor.

It wasn’t the only reason. According to the World Gold Council (WGC) October commentary, gold’s fall from grace since its October 30 peak can also be attributed to several other factors – the strength of the US dollar and momentum factors including the lagged gold price, ETF outflows and the likely unwinding of pre-election hedges.

Since then, while the gold price – it closed at $US2635 ($4040) yesterday – and stocks have rallied again, analysts remain divided on how Trump’s policies, geopolitical and economic, will influence the gold price.

A starting point is to remember that during the first Trump presidency, the gold price jumped from US$1,209 ($1,851) an ounce on January 20, 2017, to US$1,839 ($2,815) on his final day on January 19, 2021 – a 52 per cent gain.

Investors were unnerved by the trade wars, especially with China, although relations with India were also tested with that country losing its preferential trade status with the US. On the geopolitical front he withdrew from the nuclear treaty with Iran and punished any country that traded with Tehran, all of which had investors seeing gold as a haven.

Although obviously not of his making, Trump’s response to the COVID-19 pandemic, particularly his multiple stimulus efforts, also rattled investors who were (rightly) worried about the long-term inflationary effect, as well as the potential to weaken the US dollar. Again, gold was a compelling alternative.

This time around, Trump has doubled down on his “America first” rhetoric, promising a fresh round of tariffs if elected, with China at the top of the list with a threatened 60 per cent tariff across the board. Leaving aside the potential for a global trade war that has some analysts nervously glancing back to that infamous 1930 US legislation, the Smoot-Hawley Tariff Act, and its role in deepening the Great Depression, tariffs are inflationary.

When coupled with tax cuts, expected loose fiscal policy and a hard line on immigration at a time when the US labour market is tight, then potential for inflation to spike again is on the cards – and that’s a positive for gold.

The contrarian view has the Trump agenda of cutting red tape and taxes, cheaper energy and overtly favouring US companies, especially the big tech stocks, laying the groundwork for US equities to enjoy a massive bull market. Since his election on 5 November, the bellwether S&P 500 index is up nearly two per cent to close at XX yesterday.

However, it’s worth noting that the S&P 500 has grown nearly 50 per cent over the past two years, lending weight to the WGC’s observation that the US equity market is already richly valued, particularly as it applies to the Magnificent Seven (Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft and Nvidia).

“Any adjustment to valuations from expected favourable tax policies should be priced in quickly. Should there be a cut to the CHIPS and Science Act, for example, that would likely result in a downward adjustment to the technology elements of the US equity indices. If the administration doesn’t roll back those expenditures, deficit concerns will continue to pose an issue and that is – all else being equal – gold friendly.”

There is no doubt that the past several years has cemented the US position as the financial and technological superpower, with the outperformance of the S&P 500 one piece of evidence of that phenomenon – and there’s no shortage of analysts who believe a Trump presidency will underpin this growth.

That remains to be seen. What is known now is his capacity to surprise, and markets hate surprises. What will happen when his promise to end the Ukrainian war in 24 hours comes to naught? Likewise, an extremely complex Middle East conflict. On the domestic front, how will he respond if the Federal Reserve starts pushing up interest rates if inflation takes off? It all portends a volatile four years, and that’s positive for the yellow metal – and self-funded retirees invested in gold stocks.

Certainly, consider taking some profits along the way, but as Matthew Jones, a precious metals analyst at London-based metals broker Solomon Global, contends, gold may see some short-term fluctuations, thanks to a higher US dollar, but its long-term future looks as good as gold.




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