Gold Prices Will Soar Under Donald Trump Presidency
Donald Trump has not left any doubt about his views on trade or the American Dollar, and it will be really good news for the gold market.
Mr. Trump, the Republican Party nominee for president, has repeatedly expressed concern over the strength of the dollar relative to major manufacturing competitor, China. China has long devalued its currency relative to the US Dollar in order to maintain a competitive edge in manufacturing and trade against the United States. Mr. Trump would like America to fight back through tougher trade restrictions and tariffs. His proposed strategies also include allowing the dollar to depreciate, to become more competitive with the Chinese Renmibi (Yuan) and other trading partners.
His proposed changes toward a more inward looking economy will have uncertain effects in the long run, but in the short run are sure to roil both domestic and foreign markets. His proposals have ranged from allowing the repatriation of currency held overseas for no or significantly lower tax rates in exchange for future taxation of the money that domestic companies earn in profit from overseas sales, to putting heavy tariffs on imported goods. He has especially singled out goods that American companies are manufacturing overseas for lower costs and are importing back into the United States, such as automobiles.
There are two ways that a Donald Trump presidency will specifically be really good for the price of gold.
Reason One, Gold is a Hedge Against A Bear Market
Gold has a long tradition of being used as an alternative investment to stocks during bear markets or times when risk is perceived to be especially high. A Trump presidency is being seen as a negative to the stock market, and we can see that reflected in the 3% drop in the S&P 500 since the FBI announced a renewed scrutiny of Hilary Clinton Emails on October 28th.
Because Trump has proposed higher tariffs on imported goods and ultimately, the changes he plans on making are unclear, the stock market is sure to respond negatively to him winning the election. If his changes do end up throwing the economy in disarray any stock market corrections are sure to be very steep. After a long bull market, the economy is due for a correction. When you combine all of this with the fact that the Federal Reserve is planning on raising interest rates soon, you have a perfect storm for a bear market.
Trump also brings risk in terms of international relations. He has threatened to “get tough” with large economies such as China, India, Russia, and Mexico. If other nations choose to respond in turn with sanctions or import tariffs on American made goods, it will greatly worsen the problem. Still worse, if his policies lead to military conflict or the threat of war looms, the market will price in even greater risk because a war can be devastating to an economy, especially among world powers. Gold will likely be one of the main assets people turn to as a hedge against the increased risk during this time.
Demand for gold will soar and the price will be driven up higher and higher if any of these threats come to fruition, and if all of them do gold may reach all time highs.
Reason Two, A Weaker Dollar Increases Gold Prices
Trump as a president is seen to portend a week dollar because he has expressed an interest in making our currency more competitive with China’s. If China is unwilling to allow their currency to re-value (which is their current stance), the other option is for us to depreciate the US dollar. Trump has expressed his willingness to do this.
If our economy goes through a recession during his presidency for the reasons explained above, it would also generally lend itself to a weak dollar due to lower GDP expectations, and the likely stimulus packages that will be unleashed by the Federal Reserve, if history is an indication of how the Federal Reserve will respond.
Gold is priced relative to the dollar, so if the dollar becomes less valuable it will take more dollars to buy an equivalent amount of gold. In this way gold is also seen as a hedge against inflation and a weak dollar. As the value of the dollar drops, it has an inverse effect on the price of gold (and other assets as well such as real estate or other commodities). Savvy investors will move their currency to gold as the dollar weakens, and then buy more dollars back in the future as the price of gold rises.
If for any of those reasons discussed the US Dollar does weaken, investors will flock into gold which will drive the price up even further with the spike in demand.
In Short Buy Gold If Donald Trump Is Elected
If you think Trump will be our next president, you may want to do what many other investors will do and take a stake in gold because prices will surely go up.