The US election is just days away, and the outcome will shape the international political and economic landscape at a very uncertain time in history. The COVID-19 pandemic has plunged global economies into recession and debt and changes of political power, especially in the US, have profound economic ramifications. Throughout 2020, gold has been on an upward trajectory, reaching historic highs and now sitting 25% up on the year. So how could the US election in 2020 affect gold demand and prices?
Changing US Politics
Any political upheaval brings with it uncertainties. Even when parties or leaders set out their store of proposed policies, these aren’t always upheld when in office. In addition, there is the possibility of a surprise victory or defeat when the race is tight. The unexpected Trump victory in 2016 surprised the markets and gold surged as the results became clear, although gold’s gains were pared as the dollar strengthened later.
During the first half of his presidency, gold fluctuated alongside fiscal policy, global politics and Trump’s erratic tweets and comments. Over the last two years though it has soared from just under $1,300 to almost $1,900 now, passing an all-time high of $2,067 on the way. It has gained almost 30% since the start of the COVID-19 pandemic alone.
Brexit Negotiations
While US election outcomes affect the dollar-denominated gold price, elections in The United Kingdom can equally affect the price of sterling and therefore the amount of gold your pound buys. More pressing at the moment though is the outcome of Brexit negotiations and how the UK exit from the EU will affect currencies, trade policies and the economy overall. Amidst this uncertainty and the increasingly likely outcome of a hard Brexit, many investors are turning to gold for its safe-haven status.
Election impacts – Biden vs Trump
A change in political party has a wide-ranging effect on economic policy, from tax to fiscal stimulus to the regulatory regime. The US is a particular case in point because the democrats currently control the House of Representatives, but not the Senate, although this may change at the election. Controlling both will ease the path of policy while controlling one or neither can stymie a president’s power.
According to the recent polls, Trump is trailing Biden and is not expected to win. However, there have been several surprise vote outcomes in recent years including Trump’s own victory in 2016 and the Brexit vote earlier that same year.
A Trump Win
An outright Trump win may cause some uncertainty initially, but his pro-industry policies are likely to placate the markets. It will also likely be positive for the dollar which can negatively impact the gold price. But the level of COVID-19 borrowing and the need for continued stimulus could weigh on interest rates which is positive for the gold price.
A Biden Win
A Biden win is expected to be supportive of gold prices. The democratic ethos leans towards higher taxes and greater regulation, which can impact stock markets and prompt a spike in gold prices according to JP Morgan analysts. A democratic win may also hit the dollar which will make gold investments a more attractive proposition.
However, there are alternative scenarios that could equally affect gold, including a Biden win without the democrats winning the Senate as well, which would curtail their power or a disputed election. Donald Trump has repeatedly sown the seeds of doubt about postal voting, which has soared as people try to avoid unnecessary travel amid COVID-19.
If the outcome is close enough for the president to question the veracity of a Biden win, the election outcome could be long and drawn out. In both these scenarios, unpredictability and uncertainty will have an effect on markets and currencies, making gold an attractive investment as a safe-haven asset.
“It’s (gold) going to move higher, it’s going to be volatile. That’s going to be true for the next month going into the election, it’s going to be true for the two months after the election,” Jeffrey Christian, managing partner of CPM Group told CNBC.
Luca Paolini, chief strategist at Pictet Asset Management told the FT, “Political risk is high, the dollar is weakening, interest rates are at rock bottom, so gold is attractive. Corporate debt is at an all-time high, government debt is high, everything is against the dollar.”
Does it matter who wins the US 2020 Election?
The polls may be right or there may be a surprise result next week but ultimately will it even matter for gold? The precious metal is a long-term investment. While it may fluctuate with a change, or stasis, in political power, it’s the future that is fundamental to the decision to invest. The longer-term problem most countries will have over the next several years is rising debt and the global measures that will be needed to bring the debt levels under control.
Back in July, the International Monetary Fund predicted that the US debt to GDP ratio would rise to 160 percent by 2030 based only on the stimulus packages that had already been agreed. This excluded the current stimulus package being debated which will raise this figure further.
The ballooning debt will need to be serviced. This will ultimately affect future government investment, the markets – which are wary of default – and individuals – who may find their spending and borrowing power curtailed too.
Protecting Investment Assets
The need to protect assets at a time when there is inevitable uncertainty increases the allure of gold. Mike McGlone, Commodity Strategist for Bloomberg Intelligence, believes the rapidly rising US debt to GDP ratio and the increase in quantitative easing on a global scale puts gold on a solid foundation for the next five years to ten years.
Gold’s safe-haven status is borne out in times of crises, and the past eight months have been a stark case in point. The next four-year US presidential term will see the global economy dealing with the after effects of the COVID-19 stimulus measures. Gold will be in demand whoever is in the White House.
