If Donald Trump manages to win the presidential election, will that be good or bad for gold?
This proves to be an interestingly controversial issue, which goes to the multifaceted nature of the precious metal as an investment.
Some market participants say that a surprise Trump victory will cause considerable market anxiety, leading safe havens like gold to surge. Others say that Trump's antipathy for stimulative monetary policies will mean more rate hikes down the line, spiking the dollar and consequently hurting gold prices.
To understand this debate, it is useful to take a step back and appreciate the way gold works in the context of a balanced portfolio. Gold generally enjoys an inverse relationship with the U.S. dollar (given that as the dollar rises in value, it takes fewer of those dollars to buy the same amount of gold); an inverse relationship with stocks (which makes sense given gold's role as a safe haven asset); and an inverse relationship with bond yields (which can be explained by gold's lack of yield; as bonds throw off more income, gold looks worse in comparison).
Some say a Trump win would be a deeply negative event for equities. After all, stocks dislike uncertainty, and a Trump victory would leave much in the air about economically important issues such as trade policy and monetary policy. Indeed, the candidate's criticism of Fed Chair Janet Yellen has led some, such as Paul Ashworth of Capital Economics, to speculate that if he were to win, she "would resign fairly quickly as a matter of principle."
This could prove to be just one of a number of volatility-inducing domino effects.
Beyond the ramifications for stocks, the U.S. dollar could lose value against a basket of foreign currencies. In a Monday missive, currency trader Kathy Lien of BK Asset Management observed that "Foreign investors in particular are extremely nervous about a Trump win and market participants have already sold dollars in fear of this possibility."
Finally, when it comes to yields, many have prognosticated that the market volatility and actual uncertainty spurred by a victory by the Republican nominee would lead the Fed to hold off on raising rates in December, even if Yellen stays at the helm.
If a Trump win will indeed lead to the drop in stocks, the drop in the dollar and the drop in yields outlined above, the stage would certainly be set for gold to rally.
But there's also an alternative theory floating around Wall Street.
Trump has made his antipathy for low-rate policies known, even using the first presidential debate to mainstream the theory that the Fed's low-rate policies have created a stock market bubble — and "a big, fat, ugly bubble" at that. Interestingly, even though he warns that "when they raise interest rates, you are going to see some very bad things happen," he also thinks that the central bank has done considerable harm by keeping rates low.
While the strands can certainly be hard to follow, it seems a fair bet that he would favor more hawkish Fed leadership. If nothing else, this would be in line with the views of Trump influencers like Carl Icahn, who has long predicted that the Fed's policies would lead to a major market crash.
A more hawkish Fed, in turn, would be bullish for the dollar and would cause rates to be higher, thus likely hurting gold prices. This line of reasoning causes strategists like Larry McDonald of ACG Analytics to predict that if Trump wins, gold would fall in the short term.
For the same reasons, technical analyst Todd Gordon's belief that Clinton will win makes him bullish on gold.
Yet for Win Thin, a currency strategist at Brown Brothers Harriman, gold trades based on Trump's stated monetary policy preferences have a major problem: "No one really knows what he stands for."
Indeed, to that point, Trump told Reuters in May that he doesn't think Yellen is doing a bad job, and said, "I happen to be a low-interest rate person unless inflation rears its ugly head, which can happen at some point ... [but] doesn't seem like it's happening anytime soon."
This goes back to the point above about the uncertainty that would accompany a Trump win creating volatility.
"A surprise Trump win is bullish for gold," Thin told CNBC on Wednesday. "He's said some really strange things, and that uncertainty coupled with the off-the-cuff and destabilizing-type remarks" would force investors to perform "a lot of guesswork" — leading investors to rush to safety after this currently unanticipated event.