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Amid growing expectations of rising inflation or even promises of more economic stimulus, analysts seem divided as to how gold will perform in the longer term and the reasons for owning the precious metal in the first place.
Gold fell Thursday after seeing significant gains on the previous day. fell back to below $1,300 a troy ounce after reaching a six week-high on Wednesday on the news that Donald Trump had been elected as the next U.S. president.
"A reflating economy, if accompanied by a dovish (Federal Reserve) has historically been one of the most bullish environments for gold. As such, the yellow metal should find support from the current U.S. policy mix," Michael Widmer, metals strategist at Bank of America Merrill Lynch, told CNBC via email Thursday.
Donald Trump has previously pledged to spend $1 trillion in infrastructure investment to boost the economy and could therefore potentially ignite inflation in the longer run. However, it is unclear whether he will deliver on such a promise.
"Looking ahead, we think much would depend on how the latest political developments affect economic growth, inflation/inflation expectations and, in turn, Fed policy and real rates," Joni Teves, strategist at UBS, said in a note.
Several economists believe that the era of deflation is over with Trump's rise to the White House. Jim O'Neill, former chairman of Goldman Sachs Asset Management, told Wednesday that two decades of deflation could come to an end with the new president. Gold is traditionally seen a hedge against inflation but is also used as a safe haven asset in times of economic stress. But it might not be that straightforward.
"While perceived higher uncertainty strengthens the case for holding gold in a portfolio as a diversifier and hedge, possible changes in fiscal policy could push real rates higher, offsetting safe haven demand and creating downside risks for gold," Teves added.
Gold has been mostly seen as a safe haven when the performance in the equity market is unstable. But, it's performance has been fairly lukewarm this week despite the major volatility in the equity markets. Thus, investors might have begun to wonder whether they should start seeing gold as more of an inflation edge, and not so much as a traditional safe haven.
"It is the right question, because if you only look at gold as a safe haven from equities, you might think you don't need it right now," Adrian Ash, head of research at the gold and silver online market BullionVault.com, told CNBC via telephone.
"But at the same time it is hard to see what is really happening to the value of money," he said.
"It would be silly to view gold as a portfolio hedge minute by minute," Ash added.
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