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Commodities

Under Trump, a new golden age (of sorts)

Rhona O’Connell  Head of Metals Research and Forecasting

Emily Balsamo  Metals Analyst

Rhona O’Connell  Head of Metals Research and Forecasting

Emily Balsamo  Metals Analyst

Uncertainty and hesitation generated by U.S. President Donald Trump's unusual style will almost surely affect 2018 gold prices.

After a respectable year in 2017, gold prices are more likely to rise than they are to languish or sink. That’s thanks in large part to the continued global uncertainty generated by United States President Donald Trump.

The safe harbor of gold

Gold is considered a safe-haven asset as a gold holding reduces the overall risk in an investment portfolio and expands the Efficient Frontier by maintaining the rate of return for reduced risk – or raising the rate of return for the same level of risk. In theory, all other things being equal, gold prices can rise when people want to avoid (or hedge exposure to) stocks, bonds and other more “risky” investments and lose buoyancy when investors are more confident and are willing to invest in other assets – or when they are cashing in gold holdings in times of crisis, using it effectively as an insurance policy. The truth is actually much more complicated, but this is a reasonable benchmark assertion.

The average LBMA London p.m. gold price in 2017 US$1,257.28, only 0.5 percent above its price the previous year, trading in a relatively narrow range with an upward bias. This was due largely to concerns over geopolitical risk, offset by mostly positive economic indicators worldwide.

The Trump Effect

In many respects, President Trump’s win in November 2016 took the political and economic establishment aback. Many observers – and insiders – simply aren’t used to his unpredictability and bombastic style. That gold jumped to USD$1,350 when President Trump and North Korea’s Kim Jong-un traded insults on Twitter in early January last year is no coincidence; fear of military conflict and the economic upheaval that would accompany created a spike in the demand for the security of gold.

With Trump’s festering relationship with North Korea, alleged murky ties to Russia, unpredictable Twitter outbursts and blunt, confrontational approach to governing, there isn’t any reason to expect his tenure will become smoother. That means investors are likely remain cautious, and this has prompted some interest in gold, helping to support its price.

Gold bars are displayed at the Ginza Tanaka store in Tokyo. REUTERS/Yuya Shino
Gold bars are displayed at the Ginza Tanaka store in Tokyo. REUTERS/Yuya Shino

Trump…and everything else

While President Trump may a key factor in determining professional investors’ attitudes in 2018, there are several other variables at play that must not be disregarded.

  • In Asia, where demand for gold is strongest, China’s economy seems to have entered a cooling-off period and while there is pent-up demand it has yet to emerge in any size.  Demand in India is expected to be roughly level with that of last year with a strengthening rupee helping to constrain domestic prices.
  • Cryptocurrencies, like Bitcoin and Ethereum, present an interesting question mark. They may attract the same type of investor as gold (in the sense of an investor who is skeptical of a government-backed fiat currency) and have reportedly siphoned off some activity from the gold market. On the other hand, should one of the cryptocurrencies’ bubble burst, something that we believe is on the cards, those investors (assuming they can get out of their positions) – and others – may revitalize interest in gold’s proven history of risk-hedging.
  • While worldwide economic indicators look strong, history shows that no period of economic growth lasts forever. Most experts agree that eventually, the global economy will contract somewhat. Exactly when and by how much remains to be seen, of course, but it’s reasonable to expect it’s a change that’s coming, and with it a possible increase in the price of gold.  Warning; if the equities markets go into meltdown, gold would be likely to have a knee-jerk downward spike as the insurance policy is cashed in, before recovering.
Gold rings are displayed for sale at a shop in Hanoi, Vietnam. REUTERS/Kham
Gold rings are displayed for sale at a shop in Hanoi, Vietnam. REUTERS/Kham

Learn more

Get further information, including anecdotes and statistics on the gold market, past and present, by downloading a complimentary copy of the 50th Anniversary GFMS Gold Survey.

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