Following a multiyear downtrend, 2016 has been something of a rebirth for the gold market. Since the beginning of the year, gold's per-ounce price has risen by more than $260, or 25%, with gold turning in its best quarter in 30 years in Q1!
Gold's trio of catalysts
What's been driving the lustrous yellow metal higher?
First, the Federal Reserve's dovish monetary policy has been a big help. Perhaps gold's biggest influencer is opportunity cost, or the act of giving up a gain in one asset for the possibility of a greater gain in another. Because interest rates have been held near a record low for more than seven years, yields on bonds, bank CDs, and savings accounts have been minimal. In many instances, investors using these tools are losing purchasing power despite their nominal interest-based gains because the rate of inflation is higher. As long as the opportunity cost of buying gold, which has no yield, remains low, gold should do fairly well.
Second, supply and demand matter. According to the World Gold Council, gold demand during the first half of the year hit 2,335 tons, the second-highest first half on record, with 15% year-over-year growth in demand during the second quarter. ETF inflows and record first-half investment demand were credited for the surge in demand. Conversely, supply increased by just 1% during the first half of 2016, its slowest increase in eight years. These supply constraints, along with growing demand, have helped lift physical gold's per-ounce price.
Finally, psychological factors have helped. Gold is a traditional hedge against uncertainty -- and with the presidential elections around the corner, we have plenty of that. The stock market has also undergone two pretty rapid corrections (one to begin the year, and the other associated with Brexit), which have investors on edge. Gold is viewed as a safe-haven investment for those who fear stock market volatility.
But this last point brings up an interesting debate: Which candidate, Hillary Clinton of the Democratic Party or Donald Trump of the Republican Party, would be better for physical gold? Understanding that the answer is nothing more than speculation at this point, let's dive in.
How Hillary Clinton could affect gold
In many respects, Clinton's policies would probably be pretty good for gold.
In particular, Clinton has full faith in the Federal Reserve to continue its current path of dovish monetary policy, which would likely keep the opportunity cost of owning gold as opposed to interest-bearing assets relatively low. With current Fed chair Janet Yellen slated to remain in charge into 2018, a continuation of the current low-yield environment would be good for gold.
Another positive of a Clinton presidency is that (and again, this is an arguable point) U.S. GDP will probably pace right around or below the inflation rate. Many of Clinton's economic proposals echo or build upon the growth initiatives of the Obama administration, meaning that we probably shouldn't expect much in the way of major economic changes if she takes office. This also means the likely perpetuation of annual federal deficits, which tend to make gold investors pretty happy.
It's also plausible that Clinton's efforts to tax wealthier individuals in order to raise more federal revenue could be viewed with uncertainty. There's been an ongoing debate for more than three decades as to whether trickle-down economics works, and boosting tax rates on the rich may or may not wind up adversely affecting economic growth.
In all likelihood, I'd opine that a Clinton presidency would be a status quo-like event for physical gold.
How Donald Trump could affect gold
On the other hand, a Donald Trump presidency has the potential to create some very large movements in the gold market.
Arguably the scariest factor for gold with a Trump presidency is what might happen with Janet Yellen and the Fed. Though Yellen's four-year term extends into February 2018, during his campaign Trump has been extremely critical of the Fed's actions of keeping interest rates near historic lows and has implied that interest rate hikes in the future could wind up letting the air out of the stock market in a big way. It's possible that if Trump is elected president Yellen won't stick around for the full length of her term. This uncertainty, combined with Trump's calls for more normalized lending rates, would be a particularly scary thing for gold as it could lead to higher opportunity costs.
Conversely, Trump's aggressive tax cuts, which focus on reducing the highest tax bracket from 39.6% to 33% and lowering corporate income tax rates from 35% to 15%, could mean that the federal government would collect trillions of dollars less in taxes than expected under the current tax system over the next decade. This would presumably increase the national debt and make gold look all the more attractive.
Perhaps the defining factor that'll determine whether Trump is good or bad for gold is whether his economic proposals generate the 4% GDP growth he's called for during his campaign. Higher growth rates could lead to inflation, and gold often rises in an inflationary environment. But keep in mind that rising growth and inflation rates could beget interest rate hikes that temper gold's gains.
It's tough to tell which direction gold would move with a Trump presidency, but considering that Trump's proposals deviate pretty substantially from the norm, the implication is the move would likely be large.
Of course, the wildcard is whether either candidate has any success in passing their proposals through Congress. Clinton may struggle to enact many of her proposals if either the House or Senate remains under Republican control, while Trump could have difficulty passing policies when so many members of his own party have distanced themselves from his ideas. If a political stalemate occurs, physical gold would probably benefit from continued low interest rates and improving demand.
Which president do you think would be better for gold?