What happens to Gold and Crude Oil if Trump Wins?

The current series of economic data of the United States shows favorable signs, indicating that the U.S. economy has a strong resilience. Recent remarks from Federal Reserve officials suggest a slowdown in the pace of interest rate cuts, if the labor market does not slow down further. The U.S. economy may experience "No landing." Therefore, the market has shifted from trading for a recession to trading for re-inflation, since the data shows that as the election approaches, the probability of Trump being elected is increasing. If Trump is elected, what kind of impact will it have on the market? We can analyze this from his policy proposals over the past few months. 

Larger Deficit

Firstly, the problem of the fiscal deficit: the fiscal imbalance of the U.S. government is becoming increasingly prominent. The budget deficit for the fiscal year 2024 reached $1.833 trillion, an increase of 8% from the previous year. The U.S. government debt soared to $35.7 trillion, with the total debt accounting for 120% of GDP.

Source: FRED

Source: FRED

According to the Committee for a Responsible Federal Budget (CRFB), under central estimates, whether it is Trump or Harris who is elected, if they follow through with their campaign plans, the U.S. fiscal deficit will expand. Harris's plan would add $3.5 trillion to the debt by 2035, while President Trump's plan would add $7.5 trillion, making Trump's deficit more than twice that of Harris. Trump’s plan will increase the debt to GDP ratio to 142% by 2035 based on CRFB’s central estimates.

To tackle such an amount of deficit, more bonds are to be issued, Problem is that other central banks are reducing the holdings of U.S. Treasury Bonds. If the price of U.S. treasuries continues to fall, it will trigger a surge in short selling of U.S. treasuries, which some famous Wall Street Investors are already doing. To attract more buyers, pushing up treasury yields is inevitable, which may make 10-year Treasury yield remain over 4% for longer period. It may lead to a revaluation of global assets.

Source: CRFB

To a certain extent, the fiscal deficit will also be transformed into inflation expectations. There is a positive association between the federal deficit and inflation.

Source: FRED, U.S. Bureau of Labor Statistics

Another uncertainty is the control of the two houses. Currently, Republicans hold 220 seats and Democrats hold 213 in the U.S. House of Representatives. In terms of the control of Senate seats, Democrats have a slim majority, controlling 51, while Republicans hold 49 seats. With a divided government, fiscal negotiations are not so easy, and there may be fiscal constraints.

Federal Reserve’s Independence may be compromised

Trump hopes to have a voice in the Federal Reserve (FED) and may interfere with the independence of the Federal Reserve. Although FED is independent, the U.S. president can influence its composition through nominations for its board of governors. Jerome Powell will remain in office until May 2026, but Trump may pressure Powell to achieve more interest rate cuts to keep interest rates low, making the economy and the stock market appear more robust.

Tariffs

Trump has stated that he would impose a 20% tariff on all goods from all countries, with a specifically high 60% rate on Chinese imports. This is a significant policy difference between Trump and Harris, while Harris would retain the existing tariffs. U.S. president can affect trade policy through tariffs without Congressional approval. Such actions could cause inflation in the U.S. Typically, importers pay the tariff and then pass along that cost to consumers in the form of higher prices.

A researcher from the Peterson Institute for International Economics (PIIE) calculated that Trump's proposed 60% tax on Chinese imports (over $3 trillion imported goods), and 20% tariff on everything else would, in combination, impose an after-tax loss on a typical American household of $2,600 a year.

Immigration

Trump also promised the biggest mass deportation of undocumented migrants in U.S. history. Immigration has a stabilizing effect on inflation by raising the supply of workers. Undocumented migrants often take on low-wage jobs that native workers are unwilling to do, and the influx of skilled immigrants has improved labor productivity while preventing wages from rising too sharply. The influx of immigrants has allowed the United States to generate jobs without overheating the economy and accelerating inflation.

Source: FRED, U.S. Bureau of Labor Statistics

Under Trump’s FED policies, tariffs and deportation, U.S. inflation would increase by 400bps to reach 6% by 2026 based from the forecast of PIIE.

Source: PIIE

Gold:

Gold is currently one of the best classes of assets, as it can hedge against both inflation and the credit risk associated with increased deficit.

Central banks around the world shift towards policy easing and lower interest rates. Meanwhile, inflation has a higher opportunity to rise, with Trump coming into office making fiscal deficits get even larger. The credibility of the U.S. dollar is also deteriorating. Against the backdrop of de-dollarization, this is a significant boost for gold prices.

The combination of potential inflation, rising fiscal deficits, and a weakening dollar makes gold an attractive asset for investors seeking to preserve wealth and hedge against economic uncertainties. Gold is often viewed as a safe haven during times of financial instability, and the current economic environment seems to be conducive to higher gold prices.

Source: CME, FRED

At the same time, Trump is almost certain to play the tariff card. If it manages to bring manufacturing back to the United States, it might help alleviate inflationary pressures. However, it is more likely that American consumers will bear the increased costs due to tariffs, causing the inflation level to shift higher. This would be beneficial for both gold and commodities.

In the worst-case scenario, if tariffs lead to a hard landing for the global economy, gold would still be the best asset for hedging risks.

Source: CME, FRED

The gold price has risen too quickly in the short term. It is advisable to wait for a market correction before making a purchase. A correction offers a lower entry point, which might increase the potential for investment returns.

Crude Oil：

In terms of energy policy, Harris would favor renewable energy and electric vehicles, continuing to support the transition to green energy. In contrast, Trump would continue to support traditional sectors such as oil, as he did during his first term, benefiting companies related to fossil fuels. Trump's specific proposals include increasing domestic production and replenishing the Strategic Petroleum Reserve. Trump also plans to end the practice of President Biden's delayed federal drilling permits and federal land leases to increase oil and natural gas production.

Although there are differences in energy policy between the Republicans and the Democrats, it's worth noting that U.S. shale oil production increased during both Trump’s and Biden’s presidencies. During Trump's presidency, the United States became the world's largest oil producer in 2018 and has maintained that position since. In fact, since then, the United States has produced more oil than any country in history. This growth in production has less to do with the policies of the two presidents and is more a result of the increasingly efficient application of new technologies. Drilling technology has been a significant driver of success in the industry.

Source: EIA

Trump’s series of policies, which expand the deficit and push up inflation, make increasing oil production a necessary path to suppress inflation. This is because oil has a direct impact on the U.S. CPI. Given Trump’s close relationship with oil and gas companies, it is predictable that U.S. shale oil production will increase, creating more jobs and helping to maintain oil prices at a lower level.

Source: CME, U.S. Bureau of Labor Statistics

In addition to stabilizing the CPI, increasing oil production can also increase exports of excess oil, and help petrodollar continues to dominate, which attracts the reflux of dollars and enhances the influence of the U.S. dollars.

Source: EIA