When it became increasingly clear that Donald Trump was about to win the US election, the price of gold soared. It reached a high of $1332 per ounce and sustained most of this rise through the day following the election victory. However, since then it has fallen back to $1220 per ounce, as investors have favoured risk-on trades rather than risk-off ones.
In the short run, this trend could continue and the price of gold may come under pressure. Investors seem to have put political risk to one side for the moment and are not all that interested in Trump’s policies on immigration and foreign policy. They are much more focused on his pledge to cut taxes for individuals and businesses while at the same time increasing spending on infrastructure. The end result of this could be increased employment as well as improved economic growth, which is making investors increasingly bullish.
Prior to Trump becoming President, it would be unsurprising for the market to continue to focus on such issues. However, once he assumes office the market’s focus may begin to shift to his wider performance as President. Political risks are hugely relevant for investors and the way Trump behaves on the world stage could have a direct impact on US economic performance.
For example, a tough stance on China could lead to both countries pursuing increasingly protectionist policies, which could hurt the long-term outlook for the global economy. Similarly, a changing relationship with Russia may cause investors to become increasingly nervous regarding the prospects for the macroeconomic outlook.
A hedge against uncertainty
Therefore, over the medium term gold has significant appeal. Its status as a store of wealth and a defensive asset remains intact. And with Trump likely to pursue major policy change as soon as he takes office, uncertainty is set to be high in 2017. This could cause an increase in demand for gold in the coming months, with rapid price rises in the precious metal relatively likely if Trump’s policies lead to higher inflation in the US.
As such, gold remains a sound investment for the long term. It may prove volatile in the short run, and could continue to disappoint somewhat in the coming weeks as investors focus on Trump-the-businessman rather than Trump-the-politician. However, gold has the potential to provide a hedge against volatility and uncertainty, which could prove to be the key themes of 2017.
One way of potentially benefitting from a rising gold price is to buy shares in gold miners. Their performance is closely tied to the price of gold. The industry as a whole has reduced costs and become increasingly efficient in recent years and with valuations being relatively low, there are wide margins of safety on offer.
