The news that Donald Trump is to be the next president in the US has done little to concern markets, as many had previously feared.
James Hughes, chief market analyst at GKFX, said: “Trumps victory speech was the initial catalyst for the move higher in markets and his interview over the weekend for US chat show 60mins also showed a calm, collected and level-headed Donald Trump. A far cry from the man the world saw during his campaign.”
He adds that Trump’s “persona since his election win cannot be underestimated as a calming influence on the financial markets”.
As a result, the S&P 500 has stabilised following an immediate sell-off after the election, while gold has fallen almost 5 per cent since the result as worried investors had moved their money into the traditional safe haven in anticipation of a market collapse.
Performance of indices in 2016
Source: FE Analytics
Despite this wobble, gold has still returned more than US equities this year, beating the S&P 500 by 9.87 percentage points over the course of 2016.
As a non-yielding asset, however, gold investors are relying on price gains alone to generate a return and with gold up 35.51 per cent year-to-date, some are nervous that there may not be much further for the metal to rise in the near future.
Capital Economics’ Simona Gambarini, said: “Markets appear to believe that a Trump victory will lead to major infrastructure spending and much more aggressive Fed tightening. As a result, gold prices have fallen.
“After jumping by over 5 per cent when it became clear that Trump would be the next US president, the price of gold has since more than reversed all of its previous gains and it is now trading at around $1,250 per ounce.
“This is surprising given that the immediate reaction seemed to be one of ‘flight-to-safety’, with most traditional safe havens, including gold, the Swiss franc and the Japanese yen, rising on the news, while equity prices and bond yields fell.
“The turnaround point appears to have been Trump’s relatively conciliatory acceptance speech, on Wednesday morning, that encouraged hopes that he will moderate his more extreme positions when actually in office.”
As a result, below Gambarini outlines the reasons gold should outperform with Donald Trump as the new president of the US.
Fiscal spending is seen as a negative for gold, as it tends to have boosted demand for riskier assets that benefit when it is on the rise, notably industrial metals and equities.
As such, this has weighed on gold prices as risk appetite returned to the markets and expectations for further tightening by the Federal Reserve were brought forward.
However, Gambarini says while some fiscal stimulus is likely, she doesn’t think that it will be all negative for gold even in the face of additional monetary tightening.
She said: “In an economy where the unemployment rate is below 5 per cent, a big fiscal stimulus at this stage of the economic cycle is much more likely to boost inflation rather than real economic growth.
“While this means that the Fed might feel it necessary to offset any fiscal loosening by hiking interest rates more aggressively, rising inflation should ensure that real interest rates will remain low by historical standards.
As a non-yielding asset, gold performs better when interest rates are low as the opportunity cost for holding the yellow metal is lower than when other assets are yielding higher returns.
Chart to show US interest rates since 1950
Source: International Monetary Fund, Federal Reserve Economic Data
As the above graph shows, despite a rate hike at the end of 2015 and another widely anticipated in December (though this has reduced somewhat following Trump’s victory) rates remain at near historically-low levels.
“It is these real interest rates that matter most in determining the opportunity cost of holding an asset like gold which can be expected to maintain (at least) its value in real terms,” Gambarini said.
“Therefore the prospect of a big deficit-funded fiscal stimulus is likely to push inflation well above the Fed’s 2 per cent target, meaning that even if the Fed raises rates more aggressively, real interest rates should remain low.
“We are therefore happy to reiterate our view that gold will be a key beneficiary of the Trump presidency as the policies announced during his campaign are likely to boost both demand for safe havens and for inflation hedges.”
While Trump has been quick to downplay some of the more extreme policies announced on the campaign trail, such as completely repealing Obamacare, others remain in his plans.
“Investors are ignoring a whole range of policies that have been advocated by Donald Trump during his campaign which could be inflationary or negative for growth and global risk appetite,” Gambarini said.
One key issue has centred around protectionist policies on trade (he threatened to impose tariffs on China and renegotiate NAFTA during his campaign), meaning there is a real risk of a trade war, she adds.
“This, in turn, could plunge the US and global economies into recession, as significant tariffs on imports would hit domestic real incomes and retaliatory measures imposed by other countries would negatively impact US exports.”
She says investors have been too quick to judge Trump following his conciliatory acceptance speech, and that he remains a divisive character.
No more so than on his foreign policies, which include building a wall on the border of Mexico and making the Mexican government pay for it and potential changes to agreements in the Middle East.
“Trump’s foreign policy poses substantial geopolitical risks, which could boost demand for safe havens. Trump’s stands on the nuclear deal with Iran could see the US scrapping the agreement with the country.”
“Moreover, his view on ISIS and Syria could result in the deployment of substantial forces in the Middle East. If his threats were enacted, tensions between the US and the Middle East could easily escalate and investors would probably seek the safety of gold.”
As a result the “euphoria about infrastructure spending” could soon be replaced by concerns about a trade war and geopolitical risks, restoring the safe-haven bid for gold, Gambarini says.
Capital Economics suggests, if some of the events above were to take place, the yellow metal could reach $1,450 per ounce by the end of 2017.