Will a 'Trump Dump' spark the next gold rush?

Will a ‘Trump Dump’ spark the next gold rush?

By Special to MoneySense on January 26, 2017
Estimated reading time: 3 minutes

Investors should make sure they're prepared for volatility

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TORONTO — There’s been an undeniable sense of optimism surging through North American stock markets since Donald Trump was elected U.S. president. In recent days, indices in Toronto and New York have either flirted with or smashed their all-time highs. Some financial experts say although there are few signs that the “Trump Bump” will end soon, investors should still ensure they’re prepared for market volatility that will no doubt come under the new U.S. administration. Historically, investors have fled to gold, a commodity that can often act as a hedge because it retains its stored value in turbulent economic times.

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Bullion becomes more attractive if inflation rises and there is global currency fluctuations should Trump carry through with his promised protectionist policies on spending and trade, said portfolio manager Stephen Lingard. “There are some real concerns around whether his policies will actually lift growth or will it just lift inflation,” said Lingard, a senior vice-president at Franklin Templeton Solutions. Stagflation, a scenario where there is persistently high inflation combined with high interest rates and high unemployment, is also a real possibility, he said. “Gold tends to be a bit of a defensive trade,” said Lingard. “With (U.S.) interest rates coming off all-time lows and the potential for them to go higher, in that sense, gold, along with other defensive assets, makes sense in a portfolio context.” That doesn’t mean the uncertainty surrounding Trump will necessarily give gold the Midas touch. The precious metal has been trading around the US$1,200 level for the past several months, after hitting US$1,900 a few years ago. Instead, investors should view gold as an insurance policy that can help offset losses in their stock portfolios if the predicted “Trump Dump” does happen. “Gold needs to be thought as portfolio insurance, like term life insurance. If it doesn’t work out, it’s probably a good thing because the rest of your portfolio is good. I would never advocate all in or all out of gold,” he said.

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Benoit Gervais, a senior vice-president and portfolio manager of resources at Mackenzie Investments, said investors would be making a big mistake if they panic and buy into the gold rush. “We are explicitly saying: ‘Don’t time it.’ Once we’re done with worrying about Trump and what he is likely to do and not do, we’ll mark it and move on to the next worry,” he said. “Depending on which of the worries you’re talking about, gold may or may not be applicable.” Gervais said it’s a good rule of thumb to allocate about five to 10 per cent of an investment portfolio in gold, whether that be in shares in gold miners or through exchange-traded funds. Investors may be nervous about what lies ahead under a Trump presidency, but they should remember that there are many different economic scenarios that can emerge that are hard to predict, he added. Gold and precious metals analyst John Ing said he anticipates demand for bullion, which holds its value better than currencies, will grow if stocks start falling. “My sense is that Trump’s ‘America first’ policy will inevitably be turning into geopolitical clashes,” said Ing, who is president and CEO of investment firm Maison Placements Canada. “There is growing demand … and when you have the geopolitical concern and monetary concern, you will have less gold coming into the market.” Watch: What’s the role of gold in a diversified portfolio? [bc_video video_id=”6023947297001″ account_id=”6015698167001″ player_id=”lYro6suIR”]