Managers should 'proactively hedge risks' as gold surges

Fears over President Donald Trump’s latest push to acquire Greenland are rippling through global markets, reviving the “sell America” trade and forcing advisors to reassess client exposure to US assets.

On Tuesday, the dollar slid, Treasury prices tumbled, and stocks sold off after Trump threatened escalating tariffs on eight NATO countries that oppose the sale of the Danish territory to the United States.

As reported by CNBC, the Dow Jones Industrial Average dropped more than 870 points, while the S&P 500 and Nasdaq Composite each fell more than 2%, pushing both benchmarks negative for the year in intraday trading in the worst day for the major indexes since October.

The US Dollar Index posted its biggest decline since last April’s “Liberation Day” tariff rollout, while the euro climbed and gold surged to record levels as investors sought safety. Spot gold hit an all-time high above $4,600 an ounce as precious metals extended gains in what one strategist called a “much broader global risk off” move.

Sean Beznicki, director of investments at VLP Financial Advisors, says this heightened era of political risk requires proactive portfolio positioning. "The United States’ increasingly aggressive posturing toward Greenland is another example of the geopolitical risk we incorporate into our investment outlook." he told InvestmentNews.

"We favor managers who proactively position portfolios to hedge such risks, whether through holdings such as physical gold bullion or strategies like short exposure to U.S. Treasuries. In the near term, U.S. dollar weakness also serves as a tailwind for our ex-U.S. positions."

READ MORE: Advisors staying the course even as headline risk rises

In line with Beznicki's preference, fears of a global trade war showed no sign of easing Wednesday morning as gold climbed to a fresh record above $4,800. On Tuesday, billionaire investor Ray Dalio warned that the dynamic could escalate into what he called “capital wars” as countries reconsider their willingness to finance US deficits and hold dollar assets.

“On the other side of trade deficits and trade wars, there are capital and capital wars,” Dalio told CNBC at the World Economic Forum meeting happening at Davos, Switzerland. “If you take the conflicts, you can’t ignore the possibility of the capital wars. In other words, maybe there’s not the same inclination to buy at U.S. debt and so on.”

Krishna Guha, head of global policy and central banking strategy at Evercore ISI, said the dollar’s slide and euro’s rise signal that global investors are looking to cut or hedge risk to a “volatile and unreliable” United States. He cautioned that the impact on the dollar and other US assets could be severe and long-lasting if Trump does not soften his stance or reach a compromise with Europe.

Advisors may also have to navigate a shift in how allies view the US as a commercial partner. In recent days, Trump has threatened tariffs of 10% on certain European imports starting Feb. 1, rising to 25% on June 1, alongside a separate threat of 200% tariffs on French wine and champagne. European officials have described the plan as “unacceptable” and are weighing countermeasures, including the European Union’s Anti-Coercion Instrument, according to CNBC.

The political clash stems from Greenland’s refusal to even entertain Trump’s latest overture to purchase the Arctic island. Prime Minister Jens-Frederik Nielsen said the country would “not be pressured” and would “stand firm on dialogue, on respect and on international law,” as European leaders convened an emergency meeting to respond to the tariff threats.

For equity markets, the selloff is colliding with already stretched expectations. Brad Long, chief investment officer at Wealthspire, told CNBC that he is not surprised the Greenland episode is hitting US stocks, given that the market is “already priced for perfection” with “high” valuations and earnings assumptions.

Long noted that while tariffs and Greenland are not new themes, “the weaponization of tariffs in the short term to achieve kind of a non-economic or maybe economic adjacent goal is new.”