As geopolitical and economic uncertainty spreads across the globe, investors are seeking safety in the markets. Donald Trump’s fiery rhetoric and divisive policies are threatening to boil over into public unrest and although the markets have been relatively calm in the wake of the new president’s controversial first days in office, there is fear around what could be around the corner.
Gold has often been seen a safe haven that investors can turn to in such times, but even the precious metal seems to be showing signs of the Trump uncertainty. Last Friday, gold futures posted the longest streak of losses since November as prices dropped Friday for the fourth straight day, cutting the year’s gains. But are investors right to turning to gold in the first place?
“Gold acts well as a hedge in times of inflation or deflation, but when you start drifting into things like political event type risk it doesn’t really act as well,” says Paul Wong, Senior Portfolio Manager, Sprott Asset Management
. “It does have some elements of a safe haven, but gold as a hedge against political risk kind of gets a little muddled.”
Those investors betting on gold are expecting the new president’s “America First’ policies to lead to domestic economic expansion, raised interest rates and a stronger U.S. dollar. Due to the fact that gold is not yield-producing and investors have to rely on price appreciation for returns, a stronger U.S. dollar makes gold less attractive as an investment option. “Gold has a high correlation to real rates and currency,” Wong says. “After the dramatic shift in bond yields - the massive selloff - it was expected for gold to be affected, simply because of the magnitude of the moves.”
Wong is keeping a close eye on the high level of cross asset class correlation currently in the markets. The 10 year U.S. yield and the yen have been highly correlated recently and gold is extremely correlated with those two as well. It’s what has been driving gold this year. “There are lots of events in the world that are causing markets to shift but when I look at gold I solely consider real rates,” Wong says. “If something happens on the geopolitical side it will be reflected in the currency markets, and therefore gold, but I don’t really interpret politics when working with gold.”
Although he tries to ignore political noise, Wong does concede that the Trump factor is making his job more difficult. He’s been in the industry for 22 years and has seen a few presidents come and go, but Trump is definitely introducing a new level of unpredictability that makes managing money increasingly complex. “Typically, you don’t see this level of correlation unless in a time of credit stress, like 2011 and 2008. Right now we don’t have any signs of credit stress and yet correlations are still incredibly high,” Wong says. “For gold, in the short-term, we expect an initial lift in February and for things to get a little choppy as we get more details around the Trump administration, which could cause volatility in the markets.”
“Gold should be seen more as a way to achieve diversification rather than a safe haven. Short-term correlation is quite high but that should fall off. The primary risk going forward is the direction real rates are going.”
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