A new ABN AMRO study states gold will rise in price under a potential Trump presidency.
“If Trump were to become president gold prices will likely perform well, because we expect that his policies will be inward looking and will weaken the fundamentals of the US economy,” ABN AMRO report author Georgette Boele said.
The report cited gold’s trajectory under previous presidents, stating that inflation has always been a driver for gold, and economic uncertainty coupled with likely domestic uncertainty will drive investors to gold, creating a more bullish market.
“During the 1980’s and 1990’s, gold prices were very sensitive to changes in inflation (expectations). During the presidencies of Ford, Carter, Reagan I, Reagan II, George Bush and Clinton I, consumer price inflation and gold prices moved in the same direction. This means that gold was seen as a hedge against inflation,” Boele said.
However, since that time more factors have begun to impact upon the gold price such as the growth/inflation mix, actual US growth rates compared to potential growth rates, and the US dollar.
This new situation was created during the second Clinton term, where US Federal monetary policy tightening quashed many inflation concerns and drove a rise in US real yields; on top of this the US also had a fiscal surplus.
This climate created a bearish gold market, which did not recover in strength despite economic crises such as the DotCom bubble bursting, with the US dollar continuing to outperform gold.
This situation soon reversed under G.W. Bush and Obama, where economic growth slumped compared to potential growth, driving gold prices higher, to reach the record heights seen a few years ago under Obama.
On top of this, the introduction of exchange traded funds, or ETFs, to the gold market meant investors could more easily invest in gold.
All of this means gold prices are now more sensitive to the US dollar and its economic trajectory.
Using this data as background, ABN AMRO forecast that a Trump presidency will result in higher political and economic risk.
“We think that the proposals made by Mr. Trump will be toned down once he is in office,” Boele said, “however, we think that the political risks resulting from uncertainty will be high under this scenario.”
“The US economy would be more isolated and trade growth would be weaker than otherwise. Meanwhile foreign direct investment would likely be hurt. In this scenario economic growth would be softer. The debt/GDP ratio would increase significantly. The policy shifts proposed would cause significant uncertainty, which would also weigh on the economy.”
She went on to state, “If Trump were to become president , gold prices will likely perform well, because we expect that his policies will be inward looking and will weaken the fundamentals of the US economy.
“In addition, his rhetoric and possibly policy actions could create domestic and international uncertainty at beast, and upheaval at worst. Our US economist expects that economic growth would be weaker. This will likely result in a more substantial rise in gold prices towards USD 1,850 per ounce over the coming years.”
This differs from the forecasts for gold under a H. Clinton presidency, with ABN AMRO predicting a more moderate gold growth rate, adding that “safe haven flows towards gold will likely be muted”.