As one of the most fiercely contested elections in modern American history sparks a rush for safe-haven assets, gold prices are soaring, with many investors expecting further increases in the future.
The net long position in gold held by hedge funds is at a four-year high.
Gold prices hit new highs this week, poised to achieve the best annual gain since 1979. Central banks and Chinese buyers initially led the charge, but as investors seek protection from market turbulence ahead of next week's U.S. presidential election, the demand has broadened. Regardless of who wins, the upward momentum for gold may continue.
"The market favors gold in uncertain situations, especially those related to geopolitical issues," said Patrick Fruzzetti, portfolio manager at Rose Advisors. "That's why investors want to hold gold ahead of the elections."
Some observers believe the gap between the two presidential candidates will be so small that it will require the Supreme Court to decide. Others, however, are skeptical that the results will be so close. In any case, the neck-and-neck polling results have led many to expect a nail-biting counting process.
Adding to the tension, Trump and his allies are telling supporters that they are on the verge of a major victory. If the election does not go their way, it will lay the groundwork for a long legal challenge that could further disrupt the markets.
Some investors are heavily betting on Trump's victory and a Republican sweep in both chambers of Congress. Trades related to his trade protectionism and growth agenda have boosted the dollar, which typically makes gold more expensive for buyers using other currencies, thereby diminishing gold's appeal. In fact, gold prices plummeted back in 2016 when Trump was first elected president.
However, this time, there is far greater concern about the intensity of the campaign, and if the results are close, investors may unwind their bets on the dollar and the stock market and flock to safe-haven assets.
Robert Mullin, portfolio manager at Marathon Resource Advisors, pointed out that if 'it takes time to decide who the winner is,' then gold prices will rise.
Deutsche Bank analyst Michael Hsueh stated in a report that Harris's victory could lead to an initial sell-off, but this decline would be short-lived. He expects that a drop in the dollar from Harris's win could boost purchasing power in countries like China and India, while prospects of an economic slowdown could prompt the Federal Reserve to cut interest rates more quickly, thereby supporting gold prices.
In addition to the vote outcome itself, a key similarity between the two candidates has led gold bulls to bet on long-term gains. Both candidates have grand spending plans that seem likely to further pressure America's public finances.
Calvin Yeoh, manager of the Merlion Fund at Singapore's Blue Edge Advisors, said, "Regardless of who wins, fiscal spending will continue, and the market is comfortable with that. For this reason, gold is the ark that everyone around the world wants to board right now."
Concerns about the consequences of spending plans are evident in the U.S. bond market, where U.S. Treasury yields have risen due to expectations of increased debt levels. This trend typically makes U.S. Treasuries more attractive than non-yielding assets like gold. However, bond investors betting that this fiscal extravagance will also accelerate inflation, erode returns, and tilt the balance back in favor of gold.
Gold remains indifferent to the surge in U.S. Treasury yields.
There are several driving factors behind this historic surge in gold prices this year, with some investors suggesting that Trump's resounding victory could strengthen these drivers, accelerating the rebound. However, whoever ultimately takes the White House, many believe gold will not lose.
Article forwarded from: Jin Shi Data