By K Raveendran
Trump divides people like nobody else does. The liberal Left all over the world are united in their assessment that there would be a presidential onslaught against whatever they stand for. It is not just people who detest Trumps return; even the elements are affected. Gold is particularly allergic to Trump, as the market reaction to his victory showed on the first day itself, though cryptos went just the opposite way.
Gold prices moved negatively on the prospects of the Trump return, coinciding with a strong dollar and optimism driven by possible economic directions under the new administration. Analysts feel gold faces significant challenges from the growing greenback strength, which has a negative corelation with the precious metal.
Trump’s prior term saw notable dips in gold prices, especially post-election in 2016 when the metal dropped from $1,300 to $1,128 per ounce by December, reacting to a stronger dollar and rising interest rates as his administration advocated growth and fiscal policies aimed at boosting the economy. Investors, meanwhile, leaned toward the dollar, betting on economic improvements over traditional safe havens like gold. Similar dynamics are resurfacing as Trump once again becomes a focal point in economic forecasts. Analysts feel that gold could encounter renewed challenges due to anticipated pro-dollar policies, creating a tug-of-war in commodities markets where safe-haven demand often competes with economic optimism.
Historically seen as a safe-haven asset in times of uncertainty, gold’s reaction to Trump’s election victories in 2016 and his subsequent return has been telling. In the past, whenever Trump’s name was linked to economic or political developments, gold—traditionally a hedge against volatility—tended to react negatively. His presidency created a distinct correlation with movements in the precious metal, and, as the market has recently shown, the fears surrounding his possible return have been enough to trigger a similar drop in the price of gold.
This negative correlation between gold and Trump’s political dominance can be attributed to several factors, chief among them being the market’s general optimism toward a Trump-led economic direction. His tenure as president was marked by tax cuts, deregulation, and a general preference for stimulating economic growth through corporate-friendly policies.
Gold, in essence, competes with the dollar as a store of value. When the dollar strengthens, as it has in recent times, gold tends to lose some of its lustre. The growing strength of the U.S. dollar has been an important feature of the global economic landscape in recent years, particularly as the Federal Reserve has made a series of hawkish decisions regarding interest rates. A stronger dollar makes gold more expensive for holders of foreign currencies, which in turn dampens demand for the precious metal.
Currently, the Federal Reserve’s policies and strong economic data are already pressuring gold prices. The U.S. dollar remains strong as recent metrics reveal the economy’s resilience, evident in metrics like the services PMI, which signalled growth, diminishing the case for immediate rate cuts. The Fed’s cautious approach to rate easing has further subdued gold’s appeal as a hedge, with rising bond yields adding additional downward pressure. Analysts posit that a second Trump term would likely reinforce this trend, with Trump’s historically pro-dollar policies further elevating the greenback and reducing the metal’s investment attractiveness, particularly if fiscal stimulus and business-friendly policies drive optimism.
Gold’s price behaviour under Trump and Biden offers insights into how political shifts affect the commodity’s market standing. During Biden’s tenure, geopolitical tensions and the pandemic’s economic fallout initially fuelled gold’s ascent, hitting peaks above $2,000 as uncertainty spread globally. Yet, unlike Trump, Biden’s policy directions provided a more conducive environment for gold by fostering cautious market sentiment. In contrast, the Trump victory may spur economic optimism, potentially reducing the demand for safe havens, with investors leaning towards riskier assets in anticipation of business-boosting initiatives.
In fact, unique challenges confront the gold market. The current economic backdrop includes the high-interest rate environment established by the Fed to tackle inflation, impacting investor strategies on gold, which lacks yield. As a result, the metal’s role as a safe haven may be tested further should Trump’s return reinforce dollar and strong economic projections. Investors are increasingly watching for signals from the Federal Reserve, which has so far suggested that rate cuts will be gradual, offering little immediate respite for gold prices.
A look at current gold prices reveals fluctuations tied to shifting rate expectations and dollar strength. The metal has experienced volatility, briefly climbing but facing resistance due to a robust dollar, which remains buoyant from high yields on U.S. bonds. This trend suggests that should Trump re-enter office with policies likely to strengthen the dollar, gold may find it challenging to gain traction, barring significant market disruptions or geopolitical tensions that traditionally lift demand for safe havens.
The latest economic data—from strong U.S. services PMI to rising consumer confidence and labour market optimism—has fuelled an expectation that the U.S. economy could continue its expansion, regardless of political upheavals. Markets are responding with increased optimism that the U.S. economy might continue on this upward trajectory. This strengthens the dollar and puts further downward pressure on gold prices. (IPA Service)
