Is gold the real "Trump put option"?

Jonathan Guthrie, the corporate editor of the Financial Times, recently wrote that although the market generally believes that Trump will timely extend a helping hand during a stock market crisis to limit losses, he believes that gold, which is beneficial for limiting portfolio losses during turmoil, is the true "Trump put option." The full content is as follows.

Initially, U.S. stock investors were optimistic about Trump's second term. One reason was the so-called "Trump put option." People believed that this Republican leader would adjust policies to support the stock market during downturns. Thus, stocks had an implied "put option," meaning that downside risk was limited.

Since the election last November, the S&P 500 index has fallen by 6%, which has weakened confidence that Trump would backstop U.S. stocks. Supporters of the "Trump put option" might argue that the stock market needs to decline further before triggering his intervention.

But I believe that the concept of the "Trump put option" is just one of many attempts by anxious experts to explain the president's behavior. They interpret Trump's fiery rhetoric as an unconventional expression of traditional political strategy. Therefore, they hope that, for the sake of expediency, Trump's chaotic impulsive behavior will be restrained.

So far, these experts have been wrong. Another group of commentators has been correct. Their view is simpler and more direct: "This is a dangerous person. He will do dangerous things."

The current U.S. president has threatened the sovereignty of Canada and Denmark, escalated trade wars, and has shown favoritism towards Russia regarding the Russia-Ukraine conflict. And this is just the beginning.

In this rapidly changing world, for many international investors, gold is the true "Trump put option." Since Trump won the election, gold prices have risen by one-tenth. After Biden exited the presidential race, making Trump's victory almost certain, gold prices soared by one-quarter. Last week, gold prices surpassed $3,000 per ounce.

Generally speaking, a "put option" is a financial derivative that allows investors to sell an asset at a fixed price in the future, thereby limiting losses. In this sense, physical gold is not a put option. But recent circumstances indicate that when destructive events are anticipated, gold prices rise, thereby offsetting losses in stocks within a portfolio.

Therefore, for gold-loving investors, now is the time to validate their investment choices; for gold-hating investors, this is a frustrating time. There has long been a theoretical dispute between these two types of investors.

Gold enthusiasts believe that gold is worth holding because humanity has valued gold for thousands of years. They often express skepticism towards currencies issued by central banks and commercial banks, sometimes describing gold as "a tool for hedging against inflation," although this claim is controversial.

The preference for gold is underpinned by a concern that the world may descend into chaos.

This is also one of the reasons why gold skeptics believe that so-called "gold bugs" are misled. A common derision is that these individuals should also invest in ammunition and canned food like doomsday preppers Gold, like Bitcoin or art, does not generate income. In fact, considering storage costs, the yield on physical gold is negative.

Trump's crazy actions have not turned me into a gold enthusiast. But I have started to take an interest in gold. Some low-probability events, including a U.S. debt crisis and attempts to subvert American democratic institutions, have increased long-tail risks.

The relatively stable political and economic period from the mid-1990s to the late 2010s now seems like a small interlude in the long river of history. At that time, many central banks reduced their gold reserves.

Since the 2007-2008 financial crisis, they have been increasing their gold holdings. Adrian Ash of BullionVault, which caters to retail gold investors, stated, "Central banks have become an important support force in the market."

Central bank officials have redefined gold as a reserve asset that can enhance economic confidence during crises. This also explains why gold prices have risen by 90% since the outbreak of the COVID-19 pandemic. Compared to foreign exchange reserves stored or traded overseas, gold is also harder to confiscate by hostile parties.

If you are a private investor, should you consider buying gold? For me, if gold is treated as a single investment, the answer is "no." I believe that assets without yield are speculative. But if Trump further undermines America's political and economic standing, then holding gold to hedge against losses in stocks and bonds does have some rationale.

Personally, I would not invest in the stocks of gold mining companies. I leave that to braver individuals to verify the accuracy of the saying: "A mine is just a hole in the ground with a liar standing at the entrance."

Holding gold exchange-traded funds (ETFs) is a better choice. These funds can closely track gold prices at a low cost, and Joseph Cavatoni of the World Gold Council calls it "a very pure way to invest."

Alternatively, you can also directly purchase gold coins or bars and pay a certain premium to own gold outright. Surprisingly, a considerable number of retail investors choose to do so. The World Gold Council reported that last year, retail investor purchases accounted for a quarter of the total demand of 4,553 tons, surpassing central bank purchases