"From Tariffs to Treasury Yields: How U.S. Policy Shapes the Gold Market"

<Main Text>

On October 25, the U.S. stock market saw the S&P 500 index end mostly flat, after rising earlier in the day. Tech stocks advanced, but banking stocks declined, weighing on the market. Notably, New York Community Bancorp (NYCB) plunged 8.3% due to disappointing earnings forecasts, affecting the banking sector as a whole. Furthermore, reports of a U.S. investigation into Tether for anti-money laundering law violations led to a sell-off in cryptocurrency-related stocks.

Meanwhile, the "Magnificent Seven" tech giants saw a 1.3% increase. Five of these companies have earnings reports scheduled for next week, with Alphabet, Meta, and Amazon expected to show growth in advertising revenue. Apple may benefit from new iPhone sales in China, and Microsoft is expected to maintain its competitive edge in the AI sector.

For the week, the market as a whole saw declines, marking the first drop since early September. Deutsche Bank’s Allen noted that caution will likely persist in the coming weeks due to the many upcoming events, especially the October employment report and the U.S. presidential election, which are expected to significantly impact future outlooks.

In economic indicators, U.S. durable goods orders for September fell for the second consecutive month. On the other hand, the October Consumer Sentiment Index reached its highest level in six months, with one-year inflation expectations remaining flat and five-to-ten-year expectations decreasing slightly. LPL Financial’s Loach commented that this data could be favorable for the Federal Reserve.

In the bond market, U.S. Treasury yields again surpassed 4.2%, with expectations of heightened volatility as the election approaches. The MOVE index, which measures volatility risk, reached its highest level this year, indicating increased election-related caution.

In the currency market, the dollar rose against major currencies, with the Bloomberg Dollar Index posting a fourth consecutive weekly gain. Depending on the results of Japan's Lower House election on the 27th, the yen may weaken further. Crédit Agricole predicts a continued dollar uptrend toward year-end and foresees a scenario where a Republican win in Congress could further strengthen the dollar.

Crude oil prices rose amid ongoing tensions in the Middle East, with WTI futures reaching $71.78. Markets are closely watching OPEC+’s potential production changes and the U.S. election’s impact on oil.

The gold market also posted a third consecutive weekly gain, with Saxo Bank’s Hansen noting that gold may be purchased as a hedge against the "Red Sweep" scenario. BofA also expects continued growth in gold investments as an inflation hedge.

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A stronger dollar and rising U.S. Treasury yields tend to create downward pressure on gold prices. In other words, yields and gold prices generally have an inverse correlation. When the dollar strengthens, gold appears more expensive to investors using non-dollar currencies, leading to a decrease in demand. Additionally, as Treasury yields rise, the opportunity cost of holding non-interest-bearing gold increases, encouraging investors to shift funds from gold to bonds. Furthermore, if rising yields, driven by monetary policy, are seen as controlling inflation, inflation concerns may decrease, reducing demand for gold as an inflation hedge and contributing to a drop in gold prices.

If Donald Trump were to become president again, the impact of his policies on the gold market would be complex and multifaceted. First, he is likely to raise tariffs, which could lead to rising domestic prices. An increase in tariffs would push up the prices of imported goods, potentially leading to higher consumer prices. In this environment of increasing inflationary pressure, gold traditionally functions as an inflation hedge, which could result in higher demand for it. Particularly under a Trump administration, if fiscal policies are loosened with tax cuts and deregulation, the economy may experience short-term stimulation, but there would also be the risk of expanding fiscal deficits.

<Explanation②>

The expansion of fiscal deficits could lead to a decline in the value of the dollar. As the dollar weakens, the relative value of gold is likely to increase. Since gold is typically traded in dollars, a decrease in the dollar's value would make gold appear relatively cheaper to investors using other currencies. Therefore, in a situation where the risk of dollar volatility increases, gold would play the role of a "stateless currency," attracting attention among investors.

Additionally, if Trump were to be re-elected, the instability in the market caused by policy changes would need to be considered. Specifically, the currency fluctuations and inflation concerns arising from his policies could increase uncertainty for investors. In such an environment, the demand for gold is likely to rise, pushing prices higher. Investors may be motivated to purchase gold as a hedge against a "red sweep" scenario, where the Democratic Party controls both the presidency and both houses of Congress.

Overall, the potential policy changes under a Trump administration could lead to rising inflationary pressures and a weaker dollar, both of which would increase the demand for gold as an important asset in such conditions.

<Reference Materials>

https://www.bloomberg.com/news/articles/2024-10-24/stock-market-today-dow-s-p-live-updates