As economic landscapes change, so does the narrative around gold. Investors are buzzing with questions: Is it too late to buy? Is gold a hedge for wealth, or just a speculative tool? How can we position ourselves strategically as we look toward Trump's next term and beyond?
Gold has a long reputation as a safe-haven asset, particularly attractive when economies face volatility. Recent events have added a new layer of intrigue, including central banks cutting interest rates, countries moving away from the US dollar and the BRICS bloc introducing a new currency concept. The anticipation has pushed the value of gold higher, but as markets correct post-election, questions deepen. Gold's recent drop to around $2,600 an ounce from its peak of $2,800 is a modest pullback after a $1,000 gain in a year, but it has left many wondering where gold stands today.
For investors, the appeal of gold lies not only in price movements, but in its role as a store of wealth. Owning gold is less about watching its price on the screen and more about preserving assets over time. Here's a closer look at why this distinction matters and how a strategic view of gold can provide peace of mind amid the complexities of today's economic environment.
Owning vs speculating on gold
One of the first considerations in investing in gold is whether you intend to own it outright or speculate on its value through paper-based investments. Physical gold, whether in bullion or coins, offers stability, freedom from counterparty risk and the security of an asset in hand – a quality that resonates with central banks around the world.
For speculative exposure, there are options like gold ETFs, mining stocks and futures. These allow you to participate in gold price movements, but do not have the inherent security that physical ownership offers. Speculative gold zones are linked to market fluctuations and can be affected by broader financial market trends. Physical gold, however, serves as a stronger store of wealth over the long term, especially in the face of global uncertainty.
For those with wealth to protect, choosing to own gold outright offers stability that speculative assets can't match. If you're considering a 3- to 5-year investment horizon, it's worth focusing on two key factors:
1. Dollar stability and inflation trends
The US dollar remains the world's dominant currency, but cracks are emerging. Central banks, including those of many emerging economies, have begun to shift their holdings away from the dollar. Since the start of 2022, central banks have been increasing their gold reserves, signaling a wariness of the dollar. The US government's sanctions, which froze Russian reserves, added to these concerns, highlighting that assets held in dollars could, under certain circumstances, be shut down by political decisions.
This trend goes beyond Russia. The BRICS nations (Brazil, Russia, India, China and South Africa) are actively seeking alternatives to the dollar. China, for example, is strengthening its global alliances, driving less reliance on the US currency. With these changes in play, the value of gold as a non-political, globally recognized asset becomes more compelling.
At the same time, the dollar faces internal challenges. With US interest rates falling, the national debt rising and inflation lurking, the dollar's purchasing power could weaken further. In contrast, gold has shown resilience in inflationary periods, providing a hedge when the value of fiat currency erodes.
2. Stock market valuations and economic cycles
Current stock market valuations are another factor to consider. A useful metric is the Buffett Index, which compares stock market capitalization to GDP. When Trump took office in 2016, this ratio was at 111%; today, it hovers around 205%, indicating that stocks may be significantly overvalued relative to the economy. In other words, market size has outpaced economic growth, a sign that a correction may be occurring.
For wealthy investors, this means exploring assets that offer safety outside of conventional markets. During Trump's previous term, gold appreciated by more than 50%, proving its strength even in an increase in debt. This pattern could repeat itself, especially if current high stock valuations face a decline.
With the US public debt close to $36 trillion and unfunded liabilities estimated at about $220 trillion, the government's traditional fiscal tools, such as interest rate adjustments, may not be as effective in the coming years. This makes gold a valuable alternative for storing wealth, providing a hedge against the possibility of weakened economic measures and currency depreciation.
Gold as a hedge against economic uncertainty
In today's economy, there is little certainty. High hopes aside, there are no quick fixes to the economic challenges ahead.
During Trump's first term, gold appreciated significantly, matching an increase in the national debt by $7 trillion. This historical precedent suggests that gold may rise again under similar fiscal conditions. Its role as a “hard asset” is invaluable when inflation approaches and government debt rises, protecting wealth where paper assets can falter.
No single asset can promise complete safety, but gold has a proven track record of maintaining its value in times of economic turbulence. For investors, allocating some wealth to physical gold offers a balanced approach to risk – providing protection if the value of the dollar falls, while retaining intrinsic value that is beyond the reach of fluctuating policies and market fluctuations.
In a world of unpredictability, where the dollar faces pressure and stock markets can be overvalued, gold stands out as a hedge – an asset rooted in history, globally trusted and removed from the risks associated with other financial instruments. In uncertain times, very few investments offer the same peace of mind.
Alex Ebkarian is COO and co-founder of precious metals trader Allegiance Gold