Will gold, too, prove a winner for investors in a Trump world?

US Fed chairperson Jerome Powell must be pretty worried.

Just when he seemed, against all odds, to be on course to pull off the economic soft landing of a lifetime, along comes Donald Trump with his pro-growth and inflationary policy pronouncements, which risks throwing it all away when the finish-line is in sight.

Of course, to add insult to injury, if Trump’s policies do snatch defeat from the jaws of victory, Powell might be blamed for it.

So how real is this risk and what does it mean for investors?

First, we should acknowledge the Fed’s achievement. The Fed, after initially ignoring the pandemic-driven inflation spike due to its alleged ‘transitory’ nature, acted aggressively by hiking interest rates. The global economy had been used to zero interest rates for a majority of the past decade.

When the Fed started hiking, investors were convinced a recession was around the corner. Thus, in 2023, most of our recession indicators were flashing red.

However, the US economy shrugged off this sharp rise in interest rates, continuing to expand and US exceptionalism was born. There was still a sense that the economy would weaken under the weight of high interest rates, but maybe a soft landing to below trend growth could be achieved, rather than an outright recession.

As Trump returns to the White House, we should not underplay what he has achieved either. Not only did the Republicans win a clean sweep to ‘control’ the White House, Senate and House of Representatives, they also won the popular vote – something that very few predicted. Arguably, this gives Trump more latitude to push through with his policy agenda, although he seems to be confronting the narrow majority in the House of Representatives by pushing the boundaries of his executive powers.

On the one hand, Trump will be very aware that the key lesson from the election is that high inflation, especially if not matched by larger wage increases, is a vote loser. Some of his policies could help reduce inflation, such as deregulation and increased oil production, although these may take some time to have an impact.

On the other hand, many of his other policies are inflationary – for instance, trade tariffs, reduced immigration (or worse, deportations) and tax cuts. While he is presumably not going to run for a third term (the jury is still out), the Republicans will become laser-focused on the mid-terms around the turn of the year.

This begs the question of how do we square the circle of needing stable to lower inflation and wanting to push through his policy agenda?

Our view is that Trump’s first 24 hours in office have offered a sneak preview of his approach. It is clear he is going to double down on immigration restrictions, but his initial stance seems to be more pragmatic on trade tariffs. He appears to be content with threatening tariffs first and seeing if countries respond by giving him what he wants.

I believe this is Trump’s approach to be viewed as business-friendly and his yardstick of success on this front is the stock market and, by extension, avoiding a sharp bond market sell-off. Indeed, Trump’s Treasury Secretary nominee Scott Bessent, in his Senate Finance Committee confirmation hearing, emphasised the importance of ensuring that the bond market functions smoothly.

This more measured approach on trade tariffs keeps the disinflationary trend intact for now. Therefore, we still expect the Fed to cut interest rates this year by 75bps. This should keep the 10-year government bond yield below 5%, which means the recent spike in bond yields is an attractive buying opportunity for investors.

This, in turn, implies that we remain bullish on global equities, with a preference for US equities due to continued US exceptionalism, potential tax cuts, a stronger earnings outlook and a broadening of equity market gains. The US financial sector and banks are likely to benefit from Trump’s deregulation policies, for instance.

Elsewhere, we believe that gold is likely to be a major beneficiary. In part, this is because we think the US dollar is in the process of peaking. The 8% rally in the US dollar since just before the election has priced in a lot of inflationary and tariff news already.

Meanwhile, the US dollar remains very elevated on a trade-weighted basis from a multi-year perspective.

Probably more important for gold is the outlook for central banks to remain strong net buyers. The sanctioning of the Russian central bank in 2022 sent shockwaves through the global central bank community, especially in those countries who do not see themselves as aligned to the US from a political perspective.

This has created a strong desire to reduce the reliance of FX reserve managers on US assets.

Now, diversifying away from US assets is very difficult to achieve and gold is by no means a solution on its own – the market is nowhere near deep enough. However, central banks have clearly stepped up their gold purchases since 2022 and are signalling more of the same.

Given this tailwind, we expect gold to rise to $2,900/oz this year after resuming its uptrend after the consolidation in Q4-2024.