An election win by Republican presidential candidate Donald Trump would fuel uncertainty in financial markets, but for commodities, the clear winner would be gold, according to Capital Economics.
“Whatever one’s personal views of the relative merits of Donald Trump and Hillary Clinton as president of the U.S., there can be little doubt that global business and investor confidence would suffer in the wake of a Trump win,” or even a disputed victory for Clinton, said Julian Jessop, head of commodities research at Capital Economics, in a Wednesday note.
Jessop said the initial uncertainty that would follow a Trump win “would surely undermine the prices of assets that are perceived to be riskier, including industrial commodities as well as equities and emerging-market currencies.”
That could ruin what has so far been a positive year for commodities overall. The Bloomberg Commodities Index BCOM, -0.16% is poised to score its first yearly climb since 2010, with zinc, sugar SBH7, -1.06% and silver SIZ6, -2.29% among those making the largest price gains.
But a Trump victory would also further boost prices of “safe havens such as gold GCZ6, -0.55% ” he said.
Jessop said the U.K.’s vote to leave the European Union—known as “Brexit”—provides a “template” on how the commodities market may react to a Trump win.
“The surprise result of the June referendum undermined the prices of industrial commodities,” including oil CLZ6, -0.60% which initially fell by around 5%, and copper HGZ6, +0.74% which fell about 3%, “while boosting the price of gold,” which initially climbed by 5%, he said.
“These moves also soon began to unwind,” because officials who “talked up the risks of Brexit shifted their rhetoric towards more positive comments designed to restore confidence,” said Jessop.
It’s possible that Trump “would quickly moderate his more radical pre-election positions too,” he said.
Once the dust settles, the longer-term implications of a Trump win for commodities would depend on what the Republican “actually did in office—what this meant for growth, inflation and interest rates and any sector-specific impacts.”
The uncertainty would make the Federal Reserve more likely to keep U.S interest rates low for longer, and the dollar would fall further against other major currencies, said Jessop. That would benefit gold, but could also support prices of all commodities in dollar terms, he said.
So if Trump does win the election, Jessop said commodities investors should keep an eye on these three key issues:
1) Prospects of a further lurch towards protectionism—Jessop said he’s skeptical that Trump will deliver in full on his threats to “impose punitive tariffs on imports from Mexico and China, which would do plenty of harm to businesses and consumers in the U.S. too.” But greater protectionism on the global economy would hurt prices for industrial commodities.
‘The only clear winner would be the safe haven of gold, whose prices has already topped $1,300 per ounce on Trump worries.’
Julian Jessop, Capital Economics
2) Potential rebalancing of energy policy toward fossil fuels—This could boost domestic demand for oil and coal at the expense of natural gas and renewables. At the same time, policy changes under Trump might also increase domestic supply of oil and coal, “so the net effect on prices would be uncertain.”
3) Prospect of an increase in geopolitical risks—Trump could reshape relationships between the U.S. and a host of other countries, including China, Russia and much of the Middle East.
Given all of that, Capital Economics suspects that “the only clear winner would be the safe haven of gold, whose prices has already topped $1,300 per ounce on Trump worries,” said Jessop.