Don't lose faith in gold just yet.
Ever since Donald Trump's shock victory on November 8, the financial markets entered a predicted phase of uncertainty. Analysts and market experts expected the weakening of the US dollar and almost everyone, myself included, figured that investors would clamour towards safe- haven assets. This is why gold has been so closely watched in the immediate aftermath of the US elections.
While Trump and Hilary Clinton were on the campaign trail, and during the final days leading up to the election, the price of gold was rising every time he narrowed her lead. But when the current president-elect defied the polls and ended up beating Hilary Clinton, gold prices--surprisingly--collapsed.
Trump's conciliatory victory speech actually softened the blow to the currency markets that many were fearing. Something that, coupled with signs pointing to a smooth transition of power, has led gold to reverse its expected course.
THE TWO SIDES OF THE GOLDEN COIN
On the one hand, bulls have good reason to worry that Trump's planned economic strategy will boost the country's growth since this will lead to a faster pace of tightening US monetary policies, which will, in turn, send bond yields higher and thus make the non-yielding yellow metal less attractive to investors. Bears believe that the Federal Reserve will more than likely raise US interest rates by the end of 2016, which will make USD assets an attractive buying option.
While this might be true in the short term, the bigger picture should give the bulls more encouragement. For one thing, the Fed could remain dovish until the US economy is more evidently revived. Then there are prospects of a higher budget deficit needed to finance the President- elect's infrastructure, which--coupled with his plans for tax cuts--will likely lead to higher inflation levels. This is when investors might strongly consider gold as a hedge.
Another factor that deserves careful consideration is the overall political risk premium. There is still a lot of uncertainty surrounding Trump's foreign policies, an area which was very controversial during his campaign. If that wasn't enough to put the global markets on edge, the EU is facing challenging times ahead with Italy's referendum on 4 December, the Presidential election re-vote in Austria which is also set for December, and elections in Germany, France and Holland in 2017. All of these elections feature a far-right candidate who has a big chance to seal victory in Trump-like fashion, thus tilting the markets towards high volatility and giving investors more than enough reason to turn to gold.
In light of this, I firmly believe that a bullish case for the yellow metal still exists. Even in a hypothetical world of rising interest rates, momentum can have a negative swing at the next big shock. While ETF liquidation is already seen in some funds, with SPDR gold trust saying its holding fell 0.71 per cent on 21 November, and 3.6 per cent for the month overall, the purchasing of physical gold is still occurring, especially in Asia.
So while the bulls have a right to fear a continuing weakness, investors could consider having a small portion of their portfolio in gold as diversification and protection against many of the impending risks during the current political climate and as we head towards 2017.
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When the current president-elect defied the polls and ended up beating Hilary Clinton, gold prices -- surprisingly -- collapsed.
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