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Arkadiusz Sieron

Arkadiusz Sieron

Arkadiusz Siero? is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of…

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Will U.S. Elections Impact The Gold Rally?

Over the past few months, we have focused – for obvious reasons – on the pandemic and the following economic crisis. However, there are also other important developments happening in the background, apart from media attention that still focuses on the coronavirus. As they can substantially affect the gold prices, precious metals investors should be aware of them. One of the most important of such issues is the U.S. presidential election that is approaching fast. And the polls suggest that we could see the change of the President in the White House. As the chart below shows, Joe Biden (blue line) has an average polling margin of 9 percent over incumbent President Donald Trump (red line).

Will Biden win? That’s a great question. Polls say so, but who trusts polls these days? We believe that it is certainly possible, given that some voters could be dissatisfied with Trump administration’s handling of the epidemic, and especially if the second wave of the coronavirus is not contained quickly and the double-dip recession arrives. Trump could share then the fate of George H.W. Bush, who lost to Bill Clinton amid the early 1990s recession following jobless recovery. However, if the economy improves, the race could tighten between now and election day.

What would President Biden imply for the US economy and the gold market? Well, although I don’t support Trump’s trade policy, I’m neither impressed with Biden’s economic agenda. Under his economic revival plan, the federal government would spend $700 billion on research and development for new technologies and energy initiatives and on American goods and services. What is key here is that Biden plans to pay for these and other programs by raising taxes “on corporations and the wealthy”. In particular, he wants to hike the corporate tax rate from the current 21 to 28 percent. I can be wrong, but Wall Street would not welcome lifting taxes, especially during the fragile recovery from the economic crisis. So, the stock market could tank, if Biden wins

But it does not have to... So far, investors are totally unfazed by the polls giving Biden higher chances. After all, still a lot can happen before November, so the markets can be waiting until the outcome of the presidential race looks more certain. It’s also possible that investors expect that Biden would moderate his proposals after elections or that they focus more on other parts of Biden’s agenda. For instance, Biden’s trade policy is less protectionist than Trump’s and he could end the trade wars with China (and other countries) that worried the markets so much last year. 

Hence, the possible effect of Biden’s triumph on equities and gold market is ambiguous. Theoretically, given that the stock market rallied, while the price of the yellow metal plunged, after Trump’s victory in 2016 (see the chart below), we should expect the reverse if Trump loses. 

But it should be too simplistic reasoning and both the stock and gold market could easily interpret Biden’s possible victory in a bullish manner, as investors tend to do during bull markets. Or, after an initial, short-term volatility, the underlying upward trends could resume. After all, Biden is generally acceptable to the investors. He is not as radical as Bernie Sanders or Elizabeth Warren. He is actually more mainstream in several aspects than Trump. And the financial markets managed to operate or even thrive under both Trump and Obama, whose vice-president was Biden.  

Related: 3 Energy Stocks To Consider Even As Markets Remain Stagnant

In other words, no matter who will reside in the White House, the current macroeconomic conditions should remain generally favorably for the precious metals. We mean here the environment of the soaring fiscal deficits (according to the CBO, the federal budget deficit was $2.7 trillion in the first nine months of fiscal year 2020, $2.0 trillion more than the deficit recorded during the same period last year!) and federal debt (according to the IMF, general government debt is expected to rise to 160 percent of GDP by 2030 even without further rounds of fiscal stimulus!), as well as negative real interest rates, and the fastest pace of growth in the money supply in the modern history, as the chart below shows. 

Moreover, no matter who wins, we do not expect radical changes in the accommodative fiscal and monetary policies, and the overall macroeconomic outlook, until the economy fully recovers from the coronavirus crisis. Investors should remember that although politics is important, what the Fed does is also, if not more, important for the stock and gold markets – and the U.S. central bank will not abandon its dovish bias, no matter who would reside in the White House. Neither Trump nor Biden would give up extravagant government spending and stimulus packages. If there is no difference, maybe we should vote for gold?

By Arkadiusz Sieron via Sunshine Profits

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  • Mamdouh Salameh on August 29 2020 said:
    American presidential elections do matter because they give a clue to the direction the United States’ foreign policy will take during the following four years. But the November elections this year will have the added importance of taking place against a background of a shrinking US economy having lost 32.9% of GDP in the second quarter of 2020, an unprecedented budget deficit of $2.7 trillion in the first nine months of fiscal year 2020, $2.0 trillion more than the deficit recorded during the same period last year and soaring to 17.9% of GDP, a federal debt estimated at $25 trillion and a devaluing US currency.

    President Trump was hoping to present himself to the American electorate in the November presidential elections as the president who injected a new life into the US economy, cut unemployment by creating millions of jobs and kept gasoline prices at their lowest level which is a must for any American president seeking re-election. But this was never to be with the COVID-19 pandemic and the economic crisis it has triggered wreaking havoc on the US economy. This has also coincided with rising racial turmoil in the United States.

    And despite Joe Biden’s having an average polling margin of 9% over President Trump, Trump still has a better chance of winning the November elections. While he takes a great share of the blame for the confused and erratic handling of the COVID-19 pandemic, the American electorate might not blame him for the miserable state of the US economy.

    If he does indeed win, he world could expect a huge escalation with Iran, a resumption of the trade war with China and an increasing provoking of China all of which could create a bullish support for a rise in both the demand and price of gold. Moreover, gold prices could benefit from many factors that could lead to a devaluation of the dollar.

    The first factor is that the dollar is overvalued by as much as 20% against a basket of six international currencies according to the International Monetary Fund (IMF).

    The second factor is that US debt spiral cannot go on indefinitely. Outstanding debts are currently estimated at more than $25 trillion and rising. To this may also be added the exposure of the US financial system to trillions of dollars of Treasury bills held by China and many other countries.

    The third factor is the challenge the petro-yuan poses to the petrodollar. The petro-yuan could be a death blow for an already weakened US dollar and the emergence of the yuan as the dominant world currency.

    Were Biden to win the elections, his hands would be full with helping the US economy to recover. Therefore he may decide to ease the tensions with China and resume a normal trade with it and he will also de-escalate tensions with Iran without lifting the sanctions against it. Such actions would have a bearish impact on gold prices.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Maxander on August 29 2020 said:
    Stock prices & Gold price are very much in positive correlation now than ever before.
    The reason is that the entire rally of gold price from $1350-1400 per ounce to current level is solely dependent on Gold ETF demand while jewelery demand is dead.
    So, if stock prices are to plunge ahead, we will see great volatility in gold price even more than Stocks.
  • G on August 30 2020 said:
    Politics don’t generally have too much effect on long term macroeconomics. Gold is a long term value store. The artificial fiat pumping props up equities artificially and will lead to inflation and interest rate hikes. This will lower store of value fold interest. However, trump effect will continue to screw up economic stability so gold may not have yet topped.

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