Gold is staging a big turnaround from its surge after Donald Trump won his bid for the presidency.
On Tuesday, gold spiked above $1,300 per ounce for the first time in eight months at the same time as risk assets like stocks sold off. But after that panicked reaction, gold reversed its course.
On Friday, gold futures were down again, by 2.4%, or $30.90 an ounce, to $1,235.
Nobody knows exactly what Trump’s four years hold, but according to Simona Gambarini, a commodities economist at Capital Economics, gold is likely to be benefit from Trump’s presidency for four reasons.
- More aggressive fiscal policy could increase domestic demand and inflation. Many investors argue that gold is a good hedge of inflation, although its inflation-adjusted performance shows otherwise. Still, there could be strong demand for gold. If the Federal Reserve raises interest rates in response to higher inflation, higher inflation should keep real rates low, supporting gold; gold does not bear any interest.
- If the protectionist policies that Trump threatened (like tariffs on China) trigger a trade war, US exports would suffer, and an economic slowdown would help lift gold prices.
- Similarly, Trump’s geopolitical policies could cause more uncertainty, prompting some investors to buy gold for safety.
- Trump has touted a return to a gold-based monetary system. That’s very unlikely, however.
In short, the bullish view on gold under Trump rests on the expectation that his policies would keep the world on edge, and that his fiscal spending plans would accelerate inflation. Gambarini forecasts that gold will rally to $1,450 per ounce by the end of 2017.