Goldman Sachs strategists said gold is a way to hedge against inflation risks that could be triggered by the U.S. election.
They believe a Republican sweep in the presidential and congressional elections would pose the biggest risk to U.S. inflation and bond returns due to higher import tariffs, slower immigration, tighter sanctions on Iranian oil, lower taxes and "greater interference in Federal Reserve policy."
Republican presidential candidate Trump has suggested replacing income taxes with import tariffs. The Wall Street Journal also reported that Trump's allies have developed plans to weaken the independence of the Federal Reserve, although the Trump campaign has not confirmed such plans.
On the other hand, the Goldman Sachs team said that there is also a certain risk in a Democratic landslide victory, that is, a significant increase in corporate taxes.
Goldman Sachs strategists led by Daan Struyven gave four reasons why gold can be used as a hedge.
The first is that it believes gold prices could rise to $2,700 an ounce by the end of the year, thanks to strong demand from emerging market central banks and Asian households. Spot gold hovered around $2,330 an ounce on Wednesday and has risen nearly 13% this year.
Second, as concerns about the U.S. government’s ability to repay its debts are likely to intensify, gold prices could rise further by about 15% if the spread on U.S. credit default swaps (CDS) widens by one standard deviation.
Third, given that Powell's term as chairman expires in May 2026 and that the previous Trump administration was more outspoken about the Fed's stance than its predecessor, the market may become more concerned about the possibility of the Fed becoming a political vassal, which could strongly support gold prices.
Finally, Goldman Sachs noted that the cost of buying gold options is low. They said that with six-month implied volatility currently at 14% (27th percentile over the past 15 years), the risk-reward of using gold call options is very attractive.
Of course, Goldman Sachs also said that gold's performance may indeed be suppressed by the Federal Reserve's "conventional tightening of monetary policy."
In addition to gold, Goldman Sachs also believes that going long on crude oil can hedge against geopolitical risks and inflation.
The article is forwarded from: Jinshi Data
