What's Next for Gold?

Investors have had several trading days to reorient themselves to the reality of a Trump presidency. Here's where they now stand in the markets:

 

  • Stocks are up sharply, at least as far as the benchmark indexes are concerned. Most of the optimism among equity investors is fueled by the prospect of increased fiscal stimulus and federal government spending as Trump has proposed.
  • Bond yields have also spiked as traders anticipate higher inflation (also due to the potential fiscal stimulus pumping more money into the economy.)
  • Expectations for a Federal Reserve rate hike in December remain largely in place, favoring a quarter-point increase.
  • Gold prices are lower than they were before Election Day. Many of the market concerns about a Trump presidency appear to have evaporated and investors have renewed their appetite for risk.

Gold seems to be the biggest casualty in post-election trading. Prices are down over 5% from their election night peaks, although they remain up around 18% from the start of this year.

At times like these, it's good to remember that the gold market can be quite volatile in the short term. Traders may look to score easy profits on the day-to-day price fluctuations in the precious metals markets. But investors should largely ignore these daily prices swings and use gold as part of a longer-term wealth preservation strategy.

The bigger economic picture remains supportive of gold prices for the purposes of preserving wealth over the long-term. Here are some reasons why:

Inflation will dent total returns--Stocks may continue to post strong post-election gains, but once inflation is factored into performance real returns may be much lower. This is an important consideration as inflation expectations grow. As a strong store of value, gold helps investors preserve the value of their wealth when inflation rises.

Geopolitical tensions remain unsettledNo matter which candidate emerged as the victor on Election Day, they both would have to face the persistent conflicts in the Middle East. With so many parties involved in the region, the risks of wider flare-ups breaking out remain high. These higher risks will help gold retain some of its attractiveness among anxious global investors.

Sustainable growth will continue to challengeThe U.S. may enjoy a boost in domestic economic activity if a government spending package does materialize, (which is still an open question.) But the problem of achieving long-term sustainable growth will continue to dog not only the U.S. but also many other advance economies as well. If growth still lags over the long term, investors may abandon riskier assets such as stocks.

Once investors fully absorb the newness of Trumps election victory, business-as-usual will likely return to the markets. However, uncertainty about the effectiveness of Trumps proposals and whether they'll make it through Congress will probably keep the markets guessing, at least until they can ascertain how he will actually govern.

Over the long term, there remain qualified reasons for owning gold in your portfolio. A precious metals allocation still makes sense in order to maintain alignment with the goals of your wealth management plan.