As the 2024 US election gets closer and the huge market fluctuations that this political event may bring, how can global investors allocate assets to overcome potential fluctuations?

Goldman Sachs tells you, buy gold and use gold to avoid rising inflation and geopolitical risks brought about by the US election.

Goldman Sachs pointed out in a report released on the 18th that holding long positions in gold has significant value and can hedge against inflation and geopolitical risks caused by geopolitical shocks such as tariffs, Fed dependency risks, and debt concerns after the US election.

The hidden risks behind the US election

Goldman Sachs cross-asset strategist Daan Struyven analyzed the potential impact of the US election results on fiscal, trade, monetary, and foreign policy, and came to three conclusions:

1. Investment portfolios under a unified government are riskier

Compared with divided governments, a unified government is more likely to experience larger fiscal deficits, drastic fiscal policy adjustments, and downward pressure on bond yields. If the Republican Party is in power, it may lead to a sharp increase in tariffs, and the Democratic Party may lead to a sharp increase in corporate taxes. Both the increase in tariffs and corporate taxes will have a negative impact on the stock market.

2. If the Republican Party wins the election, US inflation and bond yields will face greater risks

With the Republican Party winning big, the upward risk of inflation seems even greater. This is because the Republican Party is more inclined to raise tariffs, slow down immigration, strengthen sanctions on Iranian oil, and try to influence the Federal Reserve's policies more. When inflation faces these upward risks, it means that bond yields face downside risks.

3. The market's response to geopolitical shocks, including tariffs, is the biggest potential fluctuating factor in the asset market

Goldman Sachs's cross-strategy experts quantified the impact of potential changes in fiscal and tax policies. They concluded that the market's potential response to the tail risks posed by tariffs and geopolitics is broader in a more active attempt to influence the Fed's policies.

Why gold?

Among the many assets, commodities, and gold in particular, stand out due to their negative correlation with inflation. When inflation unexpectedly rises, commodities can provide strong returns, while actual returns on stocks and bonds often suffer. This phenomenon is particularly evident in the late stages of the business cycle, where demand exceeds supply and inventories are low, driving commodity prices to rise.

As a commodity, gold is effective against inflation. Because when inflation unexpectedly rises, commodities tend to provide rich returns, while the actual returns on stocks and bonds are often negative.

Historical data shows that when the US inflation rate unexpectedly rises by 1%, the actual return on commodities will increase by an average of 7%, but the return on bonds and stocks is -3% and -4%, respectively.

Facing the uncertainties brought about by the US election, Goldman Sachs believes that buying gold can effectively counter the corresponding inflation and geopolitical downside risks. There are four reasons:

1. Central bank and household allocation requirements

Goldman Sachs is optimistic that the price of gold will rise to 2,700 US dollars/ounce by the end of this year due to strong demand for gold from central banks in emerging markets and Asian households.

2. Geopolitical and tariff risks

Holding long positions in gold can also help counter the risk of falling stock prices caused by trade wars

3. Fiscal and currency risks

Goldman Sachs anticipates that gold prices could rise by about 15% if the US CDS spread widens one standard deviation against the backdrop of possible heightened concerns about US debt. As Federal Reserve Chairman Powell's term expires in May 2026, and the previous Trump administration's tough stance on the Fed's position, the market is more worried that the Fed's decisions will be interfered more by the federal government, which may provide strong support for the price of gold.

4. Low insurance costs

Currently, the 6-month implied volatility is 14%, ranking 27th in the past 15 years, and the deviation between call options and put options is quite normal, so we think using gold call options will bring attractive returns.

Struyven concluded that although US inflation slowed in May, investors have reason to be wary considering that inflation in the first quarter exceeded expectations, the US government's continued large-scale fiscal deficit, and possible inflation policies after the general election. Historical experience tells us that inflation often rises quietly in times of political change. Therefore, holding long positions in gold is of significant value.