Gold – Is it time to hedge?
Since our last update on gold, we highlighted a weakening dollar driven by uncertainty surrounding the presidential election and geopolitical factors as key contributors to increased demand. While some of these factors have become clearer, additional fears have emerged adding to uncertainty of future gold prices.
Positive or Negative Outlook for Gold?
The US, with lowered taxes for both businesses and private individuals, faces increased tariffs that will raise the general price level. These projections suggest that Trump’s policies will make it more difficult for the Federal Reserve to cut rates, potentially increasing foreign inflows and maintaining high demand for USD. However, for gold, this could reduce demand since it is a dollar-denominated asset, making it more expensive to invest in.
On the contrary, some economists agree on the inflationary pressure Trump’s policies may cause but disagree on the robustness of the US economy. If rising inflation prevents the Federal Reserve from lowering interest rates, it will challenge the US economy’s ability to sustain high valuations. Initially, this scenario would not favor gold due to higher interest rates as yields and gold tend to work in opposite directions. However, inflation, combined with economic uncertainty, could still support the case for gold. When increasing interest rates are combined with the belief that its effect will not be enough to substantially reduce inflation enough it may still prove to be a good option.
How does gold work as an inflationary hedge?
Gold can serve as a potential inflationary hedge. When the dollar loses value, gold typically becomes more expensive, meaning an owner of gold would receive more dollars for each ounce of gold. The self-fulfilling nature of gold investments also contributes to its effectiveness as a hedge. Investors tend to switch to gold during uncertain times, increasing demand and driving up its price. Additionally, gold has intrinsic value and a finite supply, unlike fiat currencies, whose value is based on trust and which central banks can print in unlimited quantities, making them more susceptible to inflation.
Historically, gold has proven to be a hedge against both inflation and economic uncertainty, as seen in 2008–2009 and during the COVID-19 pandemic. While these two events were vastly different in nature and cause, inflation was a significant factor affecting both. However, gold has not always been an effective hedge; in 2013, despite monetary stimulus, inflation remained low, and investors favored other assets, resulting in a drop in the price of gold.
Geopolitical Risk
Geopolitical risks, as discussed in our previous article, including the Russia-Ukraine war shows no signs of easing while the conflict between Israel and Hizbollah is closing in on a ceasefire deal, which resulted in a drop in gold prices. Highlighting how quickly the landscape is changing and how little can be known for certain.
In regard to the Russia-Ukraine war, Donald Trump has repeatedly claimed during his campaign that he could end the war quickly upon entering office, such assertions should be approached with skepticism. The very nature of these conflicts is deeply entrenched and complex. So far, Trump has not presented a concrete plan.
Every action taken by the US and, ultimately, Ukraine has been met with retaliatory warnings from Russia. The latest escalation, at the time of writing, was Russia’s response to Ukraine’s use of long-range missiles, which led to an increase in gold prices. It should be noted that even though gold has dropped in price over the last couple of months, the overall performance when zooming out to a year is up. Currently, gold is trading at around … however, as new information and developments emerge regarding the factors discussed in this article, market sentiment may shift.
Conclusion
The case for gold is not particularly optimistic, as its strength relies on the US economy’s inability to withstand higher interest rates and on geopolitical conflicts that either escalate or remain unresolved. The answers to these questions will unfold over time, but closely monitoring Federal Reserve interest rate decisions can provide clues about the future of the US economy. Regarding geopolitical risks, much faith is placed in the hands of the newly elected president. Any shortcomings in his ability to address these issues will likely signal what lies ahead. As always, uncertainty creates opportunities for both short- and long-term investors. Gold is by no means a risk-free investment, but due to its self-fulfilling nature during inflationary pressures it can be expected to experience volatility in the foreseeable future.
Risks
Investors in the products are exposed to the risk that the Issuer or the Guarantor may not be able to meet its obligations under the products. A total loss of the invested capital is possible. The products are not subject to any deposit protection.
If the product currency differs from the currency of the underlying asset, the value of a product will also depend on the exchange rate between the respective currencies. As a result, the value of a product can fluctuate significantly.
The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected
Product and possible financing costs reduce the value of the products.
Due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.