Gold prices have seen a significant rise as demand for safe-haven assets increases, coinciding with one of the most competitive US elections in recent history, with many investors expecting gold to continue to rise.
Gold prices hit new record highs this week and are on track for their best year since 1979. Central banks and Chinese buyers started the rally, but demand has increased as investors seek protection from market turmoil ahead of next week’s election. Regardless of the outcome, the rally could continue.
Gold Advantage
“Markets favor gold in times of uncertainty, especially when it comes to geopolitical issues,” said Patrick Fruzzetti, portfolio manager at Rose Advisors in New York. “For that reason, investors may want to hold gold as the election approaches.”
Some observers have suggested that a narrow win in the election could require the Supreme Court to intervene to decide the outcome. Others are skeptical that it will come to that, but close polls have many predicting a tense counting process.
Adding to the tension are statements from Donald Trump and his allies, who are telling their supporters that they are on track to win a landslide. This scenario sets up a scenario of protracted legal disputes if they do not win, which could lead to further market turmoil.
Some investors have bet heavily on Trump winning and Republicans taking control of the White House and a majority in Congress, tying those investments to his protectionist, growth-friendly agenda, which has boosted the value of the U.S. dollar. A stronger dollar typically reduces the appeal of gold because it becomes more expensive for buyers using other currencies. Indeed, gold prices fell in 2016 when Trump won his first term.
But this time, growing concerns about the competition, and the close results, could prompt investors to abandon bets on the US dollar and financial markets and head towards safe-haven assets. Spot gold reached around $2,750 an ounce on Friday, rising after US jobs data fell short of expectations.
Uncertain outcome
Gold prices are likely to continue to rise if it takes too long to announce a winner, said Robert Mullen, portfolio manager at Marathon Resource Advisors. If the outcome is clear, he said, “we could see some risk being taken out of the market.”
Deutsche Bank analyst Michael Sueh noted in a note to clients that a Harris win could trigger a sell-off in gold in the early stages, but it would be short-lived. A weaker dollar as a result of Harris’s win could boost purchasing power in countries like China and India, while the prospect of slower growth could prompt faster U.S. interest rate cuts, supporting gold.
In the long run, there is one thing in common between the candidates that has gold bulls expecting lasting gains, as both contenders have big spending plans that could further strain US public finances.
“The market is receptive to the idea that fiscal spending will continue regardless of who wins,” said Calvin Yeoh, who co-manages the Merlion Fund at Blue Edge Advisors in Singapore. “That’s why gold is the lifeboat that everyone around the world wants to take right now.”
US bonds
Concerns about the fallout from the spending plans are evident in the U.S. bond market, where Treasury yields have risen on expectations of higher debt levels. While this trend makes bonds more attractive compared to non-interest-rate assets like gold, bond investors are betting that the big spending will boost U.S. inflation, reducing yields and boosting gold’s appeal.
Given the many factors driving gold’s historic rally this year, some investors believe a big Trump win could fuel these factors, accelerating the rally. But regardless of who wins the election, many believe gold can’t afford to lose.
