Why bets on a Trump election win are sending gold to record highs

Traders are investing in safer assets in case a Republican victory brings inflation and instability

Donald Trump says that he wants to be a weak-dollar president. In an interview in July, the Republican candidate warned that the strong US dollar was “a big currency problem” and “a tremendous burden on our companies”.
The irony is that Trump’s promised economic agenda is already starting to push the dollar up.
Markets are rapidly ramping up their bets on a Trump presidency, and the result is a stronger dollar, surging interest rates on long-term government debt, a jump in cryptocurrency prices, and a new record high in gold prices.
But economists believe this is only the beginning of the so-called Trump trades. John Hardy, chief macro strategist at Saxo Bank, says nothing is fully priced in and there will likely be even bigger movements when the first exit polls emerge.
So where are traders moving their money, and why?
The opinion polling website FiveThirtyEight shows Kamala Harris’s lead over Trump in the polls is narrowing steadily. In late August, she had a 3.7 percentage point lead in the popular vote; today she is ahead by just 1.8 points.
Because of the structure of the US electoral college system, this means Trump is currently on track for victory. “It is all about the swing states. Even if the polls are accurate, there is a very strong risk that Trump becomes president,” says Hardy.
Back in 2016, Trump won the presidency despite trailing Hilary Clinton by 2.1pc in the popular vote. Polymarket.com, a betting odds site, says there is a 61pc chance of a Trump victory, versus 39pc for Harris.
Economists warn that Trump’s economic agenda will be inflationary.
Trump has promised particularly aggressive increases in tariffs on foreign goods entering the country. He plans to introduce a charge of up to 20pc of the value of goods from other countries, and 60pc on imports from China. These charges would be paid by the companies importing the goods.
If imposed in their entirety, these tariffs could add nearly a whole percentage point to inflation while knocking 1.5 percentage points off GDP growth, according to Morgan Stanley.
On top of this, Trump has pledged to slash corporation tax rates from 21pc to 15pc for firms that make products within the US, scrap taxes on social security benefits, and roll out tax credits for companies purchasing heavy machinery.
He is also expected to scale back the power of financial regulators and unwind some of the reforms introduced in the wake of the financial crisis.
The Trump agenda is more likely to boost growth, but it will also be inflationary and erode fiscal credibility, says Hardy. “You’re running even larger, gaping deficits. And then what does the Fed have to do to keep things orderly?”
Interest rates on US government bonds are rising fast.
Yields on 10-year US Treasuries have jumped from 3.78pc at the end of September to 4.12pc, the highest rate recorded since July.
This rise in long-term government debt costs reflects the possibility of future inflationary pressure and higher government borrowing with Trump’s economic agenda, says Luke Bartholomew, deputy chief economist at abrdn.
“I think it is pretty unambiguous that a Trump presidency does involve somewhat higher yields,” he adds.
Trump’s agenda will likely mean instability for the US economy. While tax cuts and deregulation should boost business, big trade tariffs would be a major drag for US firms, says Hardy. “Markets need to recognise there’s a general volatility risk around all of this.”
A trade war would mean higher inflation, which in turn would mean slower interest rate cuts from the Federal Reserve. “That would be a somewhat painful combination for the US economy,” says Bartholomew. Trump’s tax cutting agency could offset some of the toll, but it would “overwhelmingly benefit wealthier households,” he adds.
The prospect of higher inflation is pushing investors to buy gold, the classic safe haven asset.
Gold prices have surged 32.6pc since the start of the year to a record high of $2,734.6. This is also because of other factors including economic stimulus in China.
Bitcoin, another asset that attracts investors wanting inflation-beating returns, has also surged.
“There is also a sense that perhaps Trump represents a more friendly regime for crypto,” says Bartholomew.
“There’s a certain irony, because his policies are precisely the kind of thing that would tend to push the dollar up,” says Bartholomew.
Trade tariffs and higher interest rates will both increase upwards pressure on the dollar, says Bartholomew. Since the end of September, the dollar has jumped by 2.68pc against the euro, up from €0.897 to €0.921.
“And if the Republicans are able to deliver a material tax-cutting regime, you might expect that to suck capital into the US as well. That tends to put pressure on the dollar,” he adds.
On the flip side, the Mexican peso has slumped as markets bet on the prospect of Trump tariffs, which would hit the country’s trade with the US.
US share prices are likely to rise on the back of corporate tax cuts, but the benefits will be more for small companies rather than big business.
“Small cap firms would benefit more from the corporate tax cut and are less internationally exposed,” says Bartholomew. “Typically they are more domestic and so are less worried about protectionism and trade wars.”
Larger firms are also heavily skewed to the tech sector, and there is a sense that Trump will be less tech friendly, Bartholomew adds.
Banks and other financial institutions will benefit most, however.
“They [finance firms] have really outperformed in anticipation of Trump 2.0, which would be great for companies because of the corporate tax cuts he has promised, and for financial stocks specifically because of the anticipation of more deregulation,” says Hardy.
But Trump’s power could be limited. If he wins the presidency, he will immediately be able to press ahead with trade tariffs. But he will only be able to push the button on his plans for business tax cuts and deregulation if he also secures a majority in Congress – a “Trump sweep”.
“All these trades are predicated on Trump not only winning but getting control of Congress. Otherwise the whole Trump agenda will be limited to geopolitics,” says Hardy.
But right now it is a Democratic win that would take markets by surprise. “If Harris wins the presidency, even if she doesn’t get control of the Senate, that would be the bigger shock,” says Hardy.