Gold reigns as US creeps toward election: Ninety One

New market analysis has shone a spotlight on gold as a key beneficiary of the structural trends driving the United States economy as its 2024 presidential election inches closer.

Head of Multi-Asset Growth at Ninety One, Iain Cunningham, has warned investors of the impact of a second Trump administration on market volatility, with fixed income markets already preparing after US treasury volatility after the recent presidential debate.

He said investors should be wary of policy changes that may come with a change in administration: “large federal deficits and higher inflation”.

“First, the prospect of higher and more volatile inflation presents an obvious risk to the real value of a portfolio. Second, there is the issue of the fiscal sustainability of the US government. Third, geopolitics and elements of deglobalisation are driving trends in dedollarisation.

“In recent years, the US has chosen a more protectionist path, coupled with a very loose fiscal stance—all of which will likely be amplified in the coming years if a Trump administration returns.

“Growing geostrategic rivalry as well domestic pressure to provide good, high-quality jobs, which have underpinned protectionism, is spurring spending and investment across a broad spectrum, from the rebuilding of supply chains to the reshoring of industry for national security reasons, and defence spending.

“This, coupled with global trends in decarbonisation, is amplifying the demand for materials. The US population is ageing, but strong immigration and a large millennial cohort, which is approaching peak household formation and goods demand, have scope to boost aggregate demand.

“These combined forces are already generating stronger inflationary impulse over the next cycle, and that will likely continue.”

Cunningham also highlighted gold as a key force that can withstand the potential of US fiscal risk as well as benefit from tailwinds from an expected US Federal Reserve (US Fed) easing cycle.

“The US may be able to venture down the current fiscal path for some time, given the US dollar’s reserve currency status, but everything has its limits. The probability attached to a US fiscal shock is non-zero and rising. At the same time, the potential holders of US Treasuries are in decline because of trends in dedollarisation.

“Nations are diversifying reserves away from US dollars, over fears that they can be weaponised against them. Some estimates point to gold holdings in international reserves having close to doubled over the past decade as a result.

“The key challenge we face is that the forces described above, which will likely be amplified by a Trump administration, cause a structurally higher rate of inflation over the next decade and require structurally higher US interest rates.

“This, coupled with the ongoing deterioration in the US fiscal position and a declining holder base could result in risk premia being built into US Treasuries. Investors may then question US fiscal sustainability. At such a point, US authorities would either chose to retrench or repress, to counter such a shock.”