Gold's Rollercoaster Ride After Trump's Re-election: Short-Term Pressure, Long-Term Potential Remains

Gold's Rollercoaster Ride After Trump's Re-election: Short-Term Pressure, Long-Term Potential RemainsUS President Donald Trump's re-election has had a profound impact on the global financial market landscape. This month, assets ranging from US equities to Bitcoin saw significant gains following Trump's victory

Gold's Rollercoaster Ride After Trump's Re-election: Short-Term Pressure, Long-Term Potential Remains

US President Donald Trump's re-election has had a profound impact on the global financial market landscape. This month, assets ranging from US equities to Bitcoin saw significant gains following Trump's victory. However, gold proved to be an exception. This article delves into the reasons behind gold's price volatility post-re-election and explores potential future trends.

The Trump Effect: Gold's Short-Term Slump

Data from Deutsche Bank reveals that gold prices plummeted to their lowest point in at least 13 US presidential election cycles within two days of Trump's victory. By last Friday, gold prices had cumulatively fallen nearly 7%, a stark contrast to assets like US equities and Bitcoin, which surged on the news of Trump's re-election.

This phenomenon is not accidental. Rob Haworth, senior investment strategist at Bank of America, notes, "Interest in gold usually arises when other investment options are no longer effective. Currently, the stock market is performing well, and even low-rated corporate bonds are providing solid returns. Therefore, people are less likely to seek alternative avenues to boost portfolio returns."

In the year leading up to Trump's re-election, gold prices soared over 30%, reaching record highs amid escalating geopolitical and economic risks. However, with the absence of gold-bullish factors like election disputes or stalemates, gold's safe-haven appeal significantly diminished in the short term.

The strengthening US dollar post-Trump's win also negatively impacted gold prices, which are denominated in dollars. Simultaneously, a robust US economy and the Federal Reserve's reluctance to further cut interest rates further dampened gold's attractiveness. Matt Miskin, co-chief investment strategist at John Hancock Investment Management, stated, "Investing in gold would be a contrarian play given how strong the US economy is right now. The current market sentiment is that fundamental and geopolitical risks are very low. It's not easy to be contrarian in this environment."

While some investors may disagree with Trump's policy agenda, the Republican landslide victory means he has greater leeway to implement his campaign promises. From tax cuts and deregulation to tariffs, Trump's policy platform has attracted hedge funds to potentially benefiting sectors like large banks and domestic US industrial companies. Jay Hatfield, CEO of Infrastructure Capital Advisors, stated, "We have more attractive investments than gold," citing opportunities in financials and other high-risk assets, asking rhetorically, "Who wants to miss Goldman's 10% rebound?"

The Rise of Cryptocurrencies and Gold Outflows

Anticipation of Trump's policies boosting digital assets has led to a sustained rise in cryptocurrencies since election day. The iShares Bitcoin Trust ETF, BlackRock's spot Bitcoin ETF, surpassed $40 billion in total assets under management for the first time last week. Simultaneously, the SPDR Gold Shares, the world's largest physically-backed gold ETF, experienced significant outflows.

Kristina Hooper, chief global market strategist at Invesco Advisers, commented, "A key implication of Trump's win is that we could see less regulation of cryptocurrencies, which will at least divert some capital away from gold; speculative demand is likely to shift to cryptocurrencies."

Gold's Future: Short-Term Adjustment, Long-Term Potential Remains

Gold prices have retreated over $200 from their historical highs, leaving many precious metal investors pondering when this downturn will end and whether a buying opportunity is approaching. On Monday morning in Asia, gold prices rebounded by over 1% amid weakness in broader Asia-Pacific stocks and Friday's poor performance in US equities, nearing the $2600 mark, prompting some gold bulls into action.

Kitco News' weekly gold survey reveals that institutional analysts remain strongly bearish on gold this week, while retail traders are relatively optimistic. Of 12 institutional analysts, only 3 anticipate a price increase, 6 predict a decrease, and the remaining 3 expect sideways movement with a downward bias. Among 181 retail investors participating in the online survey, 78 expect gold prices to rise, 71 expect a decline, and 32 anticipate consolidation.

David Morrison, senior market analyst at TradeNation, points out that while recent technical improvements exist, declaring a bottom is premature. "Gold bulls are hoping the sell-off since Trump's re-election last week is over, but there is no indication yet that this is the case."

However, the long-term outlook for gold remains positive. Trumps aggressive commitments to taxes and tariffs could ultimately lead to higher deficits and inflation, potentially prompting renewed buying of gold as an inflation hedge. Should Trump's second term disrupt global trade and geopolitics, it could also incentivize central banks, like Russia's, to continue purchasing gold to diversify away from the US dollar reserve system.

Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA, notes, "Many 'friends' and 'somewhat neutral' countries' reserve managers will also be concerned about Trumps more erratic foreign policy and the implications for their reserve security." He adds that the current gold sell-off is "more of a buying-the-dip story." After the sharp drop following the US election, gold has entered a more reasonably priced range.

In conclusion, the impact of Trump's re-election on the gold market is complex, with several factors suppressing prices in the short term. However, gold retains considerable investment value in the long term, with its safe-haven attributes and inflation-hedging capabilities potentially coming to the fore in the future. Investors need to closely monitor geopolitical developments, US economic data, and dollar movements to make informed investment decisions.