Calling all gold bugs: Gold’s luster may grow even shinier in the months prior to November’s election.
Though gold prices have come off recent highs, some experts are still betting on the commodity as a way to hedge the outcome of the upcoming U.S. election. The thinking is: regardless of who wins, the U.S. dollar is expected to depreciate as the U.S. embarks increasingly on more fiscal stimulus while the Fed, engage in a monetary stimulus program of its own, signals to the world that it’s “okay” with inflation. Yup. An entity that used to safeguard against inflationary pressures suddenly thinks we need some. And so…as more money gets printed, an increasing number of investors are expected to seek out gold as a safe haven. Meanwhile, both President Trump and Joe Biden have signaled a willingness to spend money, for better or for worse, and thus, significant government spending may further add to the dollar’s depreciation in the near term.
But can Gold momentum last? US Dollar Still A Sanctuary
The question now is: how sustained might this US dollar decline actually be? In other words, for how long should investors be looking to real assets?
Last month, the U.S. dollar plunged 5% against a basket of its peers–a relatively large decline in such a stable foreign exchange market. The economic fallout from coronavirus has taken its toll on the U.S. economy resulting in an estimated $4-$6 trillion dollars worth of fiscal and monetary spending packages. The fallout has even caused some to question the long term stability of the dollar, asking whether we need a Bretton Woods 2.0 type event to stabilize our currency. While I don’t anticipate we will be revisiting Bretton Woods anytime soon (although there is a great hotel there, the Omni Mt Washington–complete with the original “gold room” where world leaders signed the initial 1944 gold standard deal and created the International Monetary Fund) I do think we’ll hear increasing rhetoric in the coming months, and possibly years, about the desire for other countries and/or economic unions to replace us as the world’s reserve currency. Amid all this chatter, it’s understandable that investors will seek diversification into an asset with perceived stability. Gold, historically, has fulfilled that role and though naysayers dispute its “intrinsic” value, it’s still a commodity that people are drawn to during challenging times.
And, these are challenging times.
That said, gold enthusiasts shouldn’t get too excited…at least not when it comes to the reserve currency issue. Despite the rumors, there’s little case for the Euro to become the world’s reserve currency…at least, not until Europe finds itself an Alexander Hamilton that will actually unite the multitude of 19 different countries, cultures and fiscal policies under one roof! After experiencing the sovereign debt European debt crisis in 2009, investors are reluctant to embark in an over-investment in a region’s currency that truly lacks political cohesion (worse in the U.S. believe it or not!) and, as such, there’s little appetite to replace the U.S. dollar on the world stage, regardless of the European stability mechanisms now said to be in place.
Meanwhile, China is a long ways away from ever assuming such a role, though, I wouldn’t be surprised to discover it’s part of their ambitious plan to assume hegemony.
As for the here and now? We may see further deterioration of the dollar given our current environment. With the Fed signaling its new and rather revolutionary policy preference tilted towards inflation, our dollar could suffer. Yet, I suspect that is simply a near-term issue. Our economy should eventually fully recover (aided by a weakened currency) and a vaccine will become readily available… thereby enabling Americans to return to economic prosperity. We hope.
Bottomline, we’re stuck in a volatile environment with emotions for the coming months. As investors prepare for a brutal election (complete with a media slugfest) the U.S. will continue taking some hits to its reputation on the world stage. Lawmakers can’t stop fighting…and, they can’t stop spending. These realities will contribute to further erosion of the dollar in the coming months.
The near-term upshot may be that gold will continue realizing higher valuations in this environment as investors seek real value. Although its valuation is already quite rich, gold’s rise is fueled in part by a dysfunctional Washington…and unfortunately, the infighting is unlikely to subside anytime soon. Gold is an important diversification tool and functions almost as a hedge against the chaos in D.C.
While I have no doubt that the U.S. dollar is here to stay as the world’s most important reserve currency (sorry, China) I also have no doubt that the coming months will bring more chaos, more discord, and thus more challenges for our country and our currency. Gold may be a beneficiary. Meanwhile, buckle up and invest appropriately.