TOKYO -- U.S. President Donald Trump's suggestion that the country might break with its traditional strong dollar policy is driving global investors into gold markets as a hedge against losses from a possible currency depreciation.
Ahead of his inauguration last week, Trump told The Wall Street Journal that "Our dollar is too strong" compared with the Chinese yuan.
Trump could shift away from the U.S. monetary policy upheld by past presidents, which has been based on the assumption that a strong dollar is in the national interest. Investors are flocking to gold, the price of which tends to move in the opposite direction of the dollar, to mitigate investment risks.
Gold experts in Japan estimate that optimism in gold markets is growing.
"European and U.S. hedge funds have started targeting gold as an investment destination, with a U.S.-China currency war in mind," said market analyst Itsuo Toshima.
Yuichi Ikemizu, Tokyo branch manager at ICBC Standard Bank, said that "funds that had been active buyers of dollars and stocks have increased their buybacks and new buy orders in gold markets." The announcement that Britain will leave the European Union's single market and Trump's comments hinting at pursuing a weaker dollar spurred these moves, he said.
Gold, known as a "stateless currency," has conventionally been used as an alternative to dollar assets. Therefore, the price of the metal often moves in the opposite direction of the dollar index, which measures the greenback against other major currencies.
U.S. interest rate hikes are bad news for gold, which offers no interest, pushing down prices. However, investors have apparently renewed their belief that gold is "the safest asset" in financial and commodity markets amid Trump's unpredictability and lower rate hike probability.
During his presidential election campaign, Trump emphasized his vow to revive the U.S. manufacturing sector and create more jobs in the Midwest's so-called Rust Belt, the former industrial heartland. Even before assuming the presidency, Trump blasted the transfer of automakers' plants to Mexico, where they can hire cheap labor and increase imports of cheap steel from China.
Toshima already at that point forecast the rise in gold prices, anticipating that Trump "at some point in time would refer to the weakening of the dollar" to revive the international competitiveness of the U.S. manufacturing sector.
Trump's exchange rate policy and trade policy may have other countries than China in mind, under his "America first" agenda. He has moved to prevent American carmakers Ford Motor and General Motors from moving their production to Mexico. Targets of Trump's attacks have also expanded to foreign carmakers including Japan's Toyota Motor and Germany's BMW.
Risks in Europe
Koichiro Kamei, a finance and precious metals analyst, said that not only the unpredictability of Trump's policies but also "political risks in Europe" are making gold markets attract investment. Trump's anti-immigrant agenda and his anti-globalization stance may spill over into Europe, where several important elections are in store.
The Netherlands will hold its next general election in March. The possibility of the right-wing, anti-Muslim Party for Freedom, led by Geert Wilders, becoming the largest political party has been pointed out. Wilders' party is also pushing for an exit from the EU.
In the French presidential election, scheduled to take place between late April and early May, Marine Le Pen, head of the far-right National Front party, is expected to take a lead. Le Pen has promised voters a referendum to decide whether France will remain in the EU.
Toshima, Kamei and Ikemizu all agreed that a so-called tail risk -- an event that has only a small probability of happening but will have a significant impact on markets if it does -- has started looming over Europe at the same time that Trump begins his term as U.S. president. They share the same view that the "start of an unpredictable era and fears spreading in the U.S. and Europe are bringing global money to gold markets."