The people have spoken, and the election brings us a brand new President and a brand new party in control of the White House. Investors are starting to favor a flight to safety on the building uncertainty and fears that inflation may soon return to the U.S. economy. The 10-year Treasury yield topped 2% following the election and could keep rising into 2017.
Traditional assets like gold and silver are certainty getting their fair share of attention from risk-averse investors right now, but the trend actually started earlier this year. Gold is up 21% year-to-date, while silver is up nearly 35% year-to-date. Part of the reason they’ve enjoyed so much success this year stems from the Brexit announcement in which investors panicked and fled from stocks.
Despite the gains investors have seen in precious metals this year, the Trump election could be the catalyst that sends them even higher going into next year.
If You're Looking for a Post-Election Trade, Silver Trumps Gold
Trump’s policies have many investors wondering where the economy might be headed. It could lead to higher GDP growth, or it could throw a wrench in international trade and cause inflation to spike. Furthermore, his thoughts on Janet Yellen and the Federal Reserve could present problems when it comes to the Fed raising interest rates. The last rate hike of 0.25% happened last December and investors were betting that another one would happen next month. But with Trump in the driver’s seat now, a rate hike could also be the end of Yellen’s career as Fed chairwoman.
The Republican sweep may also have another effect on the U.S. economy that will help precious metals. There’s a strong correlation between the rise of gold, and subsequently silver, and an increase in government debt. That means, if there’s a tax cut coming, it could cause debt levels to rise and precious metals would gain value as the U.S. dollar falls.
While gold and silver are the first trades investors look to when faced with an uncertain market, silver is often the more overlooked one. That’s because silver generally lags behind gold’s movement – whether it goes up or down. Investors tend to have short attention spans and hop aboard the first asset class that shows signs of growth.
But while silver may be slow to move, it moves in a much greater range. Just look at the difference in gains this year. Whether it’s inflation that rises or interest rates, precious metals will benefit. Because silver has more room to run, investors would be better off passing on the gold trade.
Both gold and silver should trend higher as investors wait for President-elect Trump to officially become President Trump. But investors who are looking for the smart play should prioritize silver over gold. The upside possibilities are much higher giving investors who are patient enough to wait for the bump up an advantage in a market with an uncertain future.