Goldman Sachs believes that holding long positions in gold can hedge inflation risks caused by post-U.S. election impacts such as tariffs and weakened independence of the Federal Reserve.
Gold is a way to hedge against inflation risks that may arise from the US election, according to Goldman Sachs strategists.
They believe that if the Republican Party wins big in the presidential and congressional elections, it will pose the greatest risk to US inflation and bond returns, due to reasons including increased import tariffs, slowing immigration growth, intensified oil sanctions against Iran, tax cuts, and "greater interference in US Federal Reserve policy."
Republican presidential candidate Trump has proposed replacing income tax with import tariffs. According to The Wall Street Journal, Trump's allies have developed a plan to weaken the Fed's independence, although his campaign team has not yet confirmed such a plan.
On the other hand, the Goldman Sachs team believes that a big win by the Democrats also entails certain risks, namely a sharp increase in corporate tax.
Goldman Sachs strategists, led by Daan Struyven, have given four reasons why gold can be used as a hedge tool.
First, they believe that due to strong demand from emerging market central banks and Asian households, the price of gold may rise to $2,700 per ounce by the end of this year. Spot gold has hovered around $2,330 per ounce on Wednesday, up nearly 13% since the beginning of this year.
Secondly, as concerns about the US government's ability to repay its debts may escalate, if the credit default swap (CDS) spread widens one standard deviation, the price of gold may further rise by about 15%.
Thirdly, given that Powell's term as chairman will expire in May 2026, and the previous Trump administration was more outspoken than its predecessor about its stance on the Fed, the market may be more worried about the possibility of the Fed becoming a political appendage, which could strongly support the price of gold.
Finally, Goldman Sachs pointed out that the cost of buying gold options is very low. They said that the current six-month implied volatility is 14% (the 27th percentile in the past 15 years), and the risk-return ratio of using call options on gold is very attractive.
Of course, Goldman Sachs also said that the performance of gold may indeed be suppressed by the Fed's "conventional tightening monetary policy."
In addition to gold, Goldman Sachs also believes that going long on crude oil has a hedging effect against geopolitical risks and inflation.