How Gold is Expected to Perform Under Trump 2.0

In recent weeks, gold has once again witnessed a spike with prices touching a fresh high of Rs 79,765 as of January 22, 2024. This recent spike can be attributed to a weaker dollar and as markets flocked to the safe-haven asset amid uncertainty surrounding the US President Donald Trump's policies.

Donald Trump, who was sworn in as the 47th President of the United States, his second non-consecutive term, signed an array of orders on the first day in office. These orders, which Trumps believes will 'Make America Great Again', include reversing some of Biden administration's orders.

Why gold rallied amid Trump's inaugural address?

During his inaugural address Donal Trump announced his plans to adopt 'America First Trade Policy', emphasising US' withdrawal from international treaties. This trade system which aims to protect American workers, could have repercussions on the global economy because a key feature of this policy is to ramp up tariffs and trade restrictions on other countries.

While Trump's inaugural address did not mention any specific tariff, he has announced plans of a 25% tariff on Mexico and Canada from February 01. He is also considering 10% tariff on China from February, though he has back tracked from his earlier threat of 60% tariff. Moreover, he has also warned of hitting the European Union with tariffs, accusing them of unfair trade practices.

Earlier, Trump had also threatened to impose 100% tariffs on Brazil, Russia, India, China, and South Africa (BRICS nation) if they create a new BRICS currency or back any other currency to replace the US dollar as the world's reserve currency.

The lack of definitive action on tariffs has spurred caution among global equity investors, including investors in the Indian equity market, which witnessed significant volatility. Investors are on their edge for further announcements from the White House that might reshape global trade.

[Read: How Donald Trump's Victory Would Playout On the Indian Equity Market]

Nonetheless, the uncertainty drove the bullish momentum in gold as it is considered a safe investment during economic and geopolitical uncertainty. Additionally, as Trump backed from imposing immediate tariffs, the Dollar weakened, making gold attractive for foreign buyers.

Trump also proposed other key policies that may have ramifications on the geopolitical scenario, global economy, and capital markets such as:

• Overhaul of immigration policy and end of the birthright citizenship for children of undocumented individuals

• Plans to expand oil and gas drilling to prioritise domestic energy production

• Intention to reclaim control over the Panama Canal

• Promise to bring corporate taxes down to 15% from the current 21%

• Recommended cuts to government programs and spendings

Further, to keep the economy buoyant and ensure growth continues, Trump may also push the US Federal Reserve to keep interest rates relatively low, as inflation has come down sharply from its peak.

How is gold is expected to perform under Trump 2.0?

Broadly Trump's unpredictable nature and, at times, not going by the rule book means an uncertain geopolitical scenario ahead. It is worth noting that many of Trumps's policy orders could possibly legal challenges. Moreover, Trump's proposed policies are expected to result in inflationary pressures and possibly result in supply chain disruption. This may prevent the US Fed from cutting rates to curb prices. A higher interest rate environment is a negative for non-yielding assets such as gold.

Thus, in the short term, gold prices are expected to remain volatile until clarity on geopolitical and economic policies of the Trump administration emerges.

Overall for 2025, while there are lot of uncertainties, World Gold Council's (WGC) market consensus expectations suggest a more modest performance for gold, but with the potential for upside catalysts as the year unfolds.

As per the consensus, the US Fed will deliver 100 bps in cuts by year end, with inflation softening but still above target. European central banks will also likely cut rates by a similar amount. The US dollar is expected to remain flat or slightly weaken as conditions normalise, while global growth remains positive but continues to grow below trend.

In this context, the actions of the Fed and the direction of the US dollar will continue to be important drivers for gold. If the economy performs according to consensus in 2025, gold may continue to trade rangebound, with the potential for some upside.

Gold is likely to remain rangebound if existing market expectations are correct. However, a combination of higher rates and lower economic growth could negatively affect investors and consumers. This could be particularly evident in Asia. Conversely, significantly lower interest rates, or a deterioration in geopolitics or market conditions will improve gold's performance.

Finally, a key checkpoint will be central bank demand as it will continue to provide a boost to gold if it remains at a healthy level.

Gold's final price performance will depend on the interaction of gold's four key drivers: economic expansion; risk; opportunity cost; and momentum.

India seems to stand on a better footing. Economic growth remains above 6.5%, and any tariff increase will affect it less than other US trading partners given a much smaller trade deficit. This, in turn, could support gold consumer demand. At the same time, gold financial investment products have seen remarkable growth and while they make up a small portion of the overall market, they have been a welcome addition to gold's ecosystem.

Should investors consider investing in gold?

Gold has been particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses. Moreover, it can also deliver positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge.

Gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio. WGC analysis shows gold is a clear complement to equities and broad-based portfolios. Gold has historically provided returns, diversification and liquidity. These characteristics combined mean that gold can materially enhance a portfolio's risk-adjusted returns.

Considering gold's strategic appeal and the potential challenges on the horizon, investors should look closely at the portfolio benefits gold can bring in 2025 and beyond.

Gold investments may be suitable for investors with moderate-to-high risk appetite looking to diversify across asset classes and hold it with a long-term investment horizon (of over 5 to 10 years). Apart from investment in physical gold investors also have the option of investing in gold through Gold Exchange Traded Funds (ETFs), Gold Savings Funds, or Sovereign Gold Schemes.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.