Gold is the actual ‘Trump put’ | USAEMALL.com

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US equity investors were initially optimistic about the second presidency of Donald Trump. A so-called “Trump put” was one reason for this. The assumption was that the Republican leader would tweak his policies to support the stock market if it faltered. Equities therefore had an implicit “put” — a limit on downside risk.

A decline of 6 per cent in the S&P 500 since November’s election has weakened the belief that Trump will backstop US equities. Proponents of the Trump put might argue that a bigger fall is needed to trigger any intervention.

I believe the idea of a Trump put is simply one of many attempts by frightened experts to rationalise the president’s behaviour. They interpret his outbursts as unconventional expressions of a conventional political strategy. They accordingly hope expedience may temper his chaotic impulses.

So far, these experts have been wrong. Another group of commentators has been right. Their simpler line has been: “This is a dangerous guy. He will do dangerous things.”

The US president has threatened the sovereignty of Canada and Denmark, intensified a trade war and sided with Russia over its invasion of Ukraine. And it is still early days.

In this changed world, gold is the real Trump put for many international investors. The price has risen by a tenth since Trump’s election victory. Since Joe Biden quit the presidential race, making that victory a racing certainty, it has jumped by a quarter. The metal broke through $3,000 per troy ounce a few days ago.

Normally, a put is a financial option to sell an asset at a fixed price in future, limiting losses. Physical gold is not, in this sense, a put. But it has recently shown that it can rise in anticipation of destructive events, counterbalancing any portfolio losses on equities.

This is therefore a validating time for investors who love gold and a discouraging one for those who hate it. There is a long-standing doctrinal battle between the two.

Gold fans think the metal is worth holding because humans have treasured it for millennia. They often distrust money created by central and commercial banks. They sometimes characterise gold as “a hedge against inflation,” though this is disputable.

Lurking in the background, is a suspicion that the world could descend into chaos.

This is one reason why gold sceptics think so-called “gold bugs” are deluded. The standard jibe is that they should also invest in ammo and canned food, like doomsday preppers.

Ad hominem arguments aside, gold, like bitcoin or art, produces no payouts. No equity dividends. No bond coupons. Indeed, physical gold has a negative yield when storage costs are accounted for.

Trump craziness has not yet turned me into a gold bug. But I have become gold curious. Low-probability events, including a US debt crisis and attempts to overthrow US democracy, have moved up the long tail of risks.

The relative political and economic stability that stretched from the mid-nineties to the late noughties now seems like a historic blip. Many central banks ran down their gold reserves then.

Ever since the 2007-2008 financial crash, they have been building up stocks. “Central banks have become very important as a support to the market,” says Adrian Ash of BullionVault, which caters to retail gold investors.

Central bankers have gone back to seeing gold as a reserve asset that supports economic confidence during crises. That helps explain a 90 per cent price rise since the Covid outbreak started in earnest. Gold is also harder for enemies to expropriate than foreign currency reserves deposited or traded overseas.

If you are a private investor, should you consider buying gold? For me, the answer is “no” if the metal is a standalone investment. Yield-less assets are speculative ones, I believe. I can see some justification for holding gold as a hedge against losses on stocks and bonds if Trump weakens the political and economic status of the US is further.

Personally, I would not bother with shares in gold miners. I would leave it to braver souls to test the accuracy of the quip: “A mine is a hole in the ground with a liar at the top of it.”

Exchange traded funds that hold gold would be a better bet. These track the gold price closely at low cost — “a very clean process,” according to Joseph Cavatoni of the World Gold Council. They include the US-listed SPDR Gold Shares ETF. A UK-listed alternative is the iShares Physical Gold Exchange Traded Commodity.

If that still sounds too arms-length, consider owning physical gold via a service such as BullionVault, which buys and stores the stuff for you.

You could alternatively go the whole hog and pay a premium for coins or ingots to own directly. Surprising numbers of retail investors do. Their purchases accounted for a quarter of total demand of 4,553 tonnes last year reported by the WGC, ahead of central banks.

You would then have to store your loot without attracting the attention of thieves. One retail buyer, interviewed during the noughties’ financial crisis, had a novel solution. He planned to use his small ingot as a door stop.

He intended to quell the curiosity of visitors by telling them it was a novelty item purchased from a joke shop. I do not recommend this. But the flippancy of his approach put the triviality of personal financial dilemmas during global crises into appropriate context.

Jonathan Guthrie is a writer, an adviser and a former head of Lex; [email protected]