Investing In Gold In Trumpian Times

June 19, 2017

Safe-haven assets always have a place in the financial markets. Investors are constantly on the lookout for ways to shore up their financial portfolios. This is particularly true during times of geopolitical uncertainty, and increasing volatility. The go-to, safe-haven asset is gold, and it has enjoyed a period of relative bullishness in recent weeks. The precious metal ascended towards the critical $1,300 per ounce level, before retreating sharply to its current level at $1,265.64 per ounce. The gold price has advanced by 3.45%, or $42.30 over the past 30-day period. Over the past 6 months, gold is up 9.02%, or $105 per ounce.

There have been some notable gains in the financial markets of late, such as the cryptocurrency Bitcoin (BTC). After a rather lacklustre performance through January 2017, the price of this digital currency has skyrocketed. At last count, Bitcoin was trading at $2,606.40, after briefly breaching the $3,000 level. Gold tends to move bullishly when geopolitical fears are rife. This is evident when a risk-off approach is adopted to equities markets – as we saw on Friday, 9 June and Monday, 12 June. A large selloff of leading tech stocks dominated global equities markets recently, and this fielded a mini gold rally.

How Is The USD Performing?

The US dollar is certainly underperforming in 2017, given all the stress of the Trump White House. The president has come under fire from all angles, and he has been relegated to lame-duck status since he assumed office in January. A barrage of opposition from Democrats and Republicans has blindsided his efforts to repeal and replace Obamacare, build the wall, enact tax reform, and move forward with deregulation of the financial sector, among others. That there are constant calls for an investigation into Russian interference in the US election have not helped his cause. Recently, the erstwhile FBI director, Jim Comey testified before the Senate intelligence committee. Market participants were anxiously looking for a smoking gun. They never found one.

Negative Real Treasury Yields Push Traders To Gold

However, the controversy that perpetually swirls around President Donald Trump threatens to be his undoing. It is also causing anxiety in the financial markets, and gold benefits from it. The US dollar index – a broad measure of the USD against 6 currencies – is currently trading at 97.19. Over the past 5 days, the DXY is up a meagre 0.40%, and for the year to date it is down 5.07%. This tends to be supportive of a rising gold price given that gold is a dollar-denominated commodity. The loss of confidence in the USD is more a referendum on Trump’s performance as president than it is a barometer of US economic performance. When the USD weakens, this makes gold more affordable to foreign buyers and it tends to rise in value. Gold tends to perform strongly when the yield on treasuries is declining. The real 2-year treasury yield and the real 5-year treasury yield are both negative in the US, and gold is a safer investment option in times of negative returns.

The Calm Before The Storm

For 2017, gold has generated returns of 9% +, despite equally strong gains in equities markets. Typically, gold performs contrary to the direction of equities markets. When a risk-off approach is adopted to Wall Street, gold rallies and vice versa. Gold is viewed as a hedge against volatility in other markets – it is dissimilar to equities, except in the case of gold ETFs, mutual funds, and shares. According to Roger R. Clemence, a leading expert from Saxon Trade, ‘A possible explanation for the parallel rise in gold and equities is an overvaluation of stocks. This is a plausible reason we are seeing both asset categories moving in the same direction.’ If we are seeing a bubble forming in equities markets, this could be a prelude to another market correction, or worse. Gold could certainly be fueled by this stock market bubble which is a signal of something ominous.

Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

Pure gold is so soft that a strong man can squeeze it and shape it.