Does The Donald Hold The Trump Card For Gold ETFs?

Includes: GLD
by: Zacks Funds

Gold is all over investors' minds this year, thanks to its fascinating returns. A flight to safety following a spike in volatility at the start and end of 1H16 brightened the appeal for the safe-haven asset gold (despite the metal's moderate fundamentals). As a result, despite only decent fundamentals, the gold bullion exchange-traded fund, the SPDR Gold Trust ETF (NYSEARCA:GLD), added maximum assets worth about $12.2 billion in 1H.

Notably, most of the 1H threats - be it global growth slowdown or the yet unseen Brexit fallout or the sudden momentum loss in the otherwise improving U.S. economy - are palpable in the second half too. Plus, there is the presidential election in November, which may cause considerable uncertainty, adding more shine to the yellow metal.

But it will be more interesting to see what happens to gold after the election. Let's take a look.

What Will Happen to Gold Post Election?

Investors should note that gold normally shares an inverse relation with the stock market. As per a source, "during the most recent 15 years during which Republicans have held the presidency, the value of the Dow has increased by 42%. During the Democratic presidencies, it has increased by 609% - 14.5 times faster."

Since 1900, the annualized return of the Dow Jones Industrial Average Index was 7% in Democratic rule and 3% in Republican rule. It means Democrats are good for stocks and Republicans are less beneficial for the risky stock market. It means safe havens like gold should shine more in Republican presidency.

Why Donald Trump May Be More Good for Gold?

Now, with the Republican candidate Donald Trump racing closer to the Democratic candidate Clinton, all eyes are now his policies. And so far, what he has delivered in speeches are mostly "inward looking," as per ABN Amro. As per the research organization, Trump's policies may hinder U.S. growth and thus may cause an upheaval in the U.S. market pushing the safe resort gold to as high as $1,850.

For example, Donald Trump intends to implement a tax reform by bringing the top individual tax rate down to 25% from 39.6%, abolish estate tax, and slash "the corporate tax rate to 15% from 35% and tax business profits of high-income households at a lower rate than their wage," as per Wall Street Journal. Though he noted that such widespread cuts would not cause higher budget deficits, chances of this happening are low.

Also, the ABN Amro analyst believes gold will see a smooth ride ahead (even if Democrats make it to the White House) on prospects of inflation outdoing growth, negative real interest rates and a "longer-term downtrend for the U.S. dollar." However, ABN Amro's analyst indicated that all the optimism from gold may vanish if the U.S. economy picks up momentum and the Fed finds it easy to hike rates frequently.

Moreover, Trump is "a low interest rate person." Concerned about the U.S. economy's $19 trillion of debt, he wants to keep interest rate low ahead so the country does not have to end up paying much higher interest.

If this were not enough, Trump may push for currency wars against key trading partners of the U.S., as per the source. Agreed, his mode of war would be via tariffs, but a lower greenback route can't be completely ruled out. All these will likely keep the greenback's value in check, and gold prices will soar as the metal is priced in U.S. dollars.

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