Which US election result is best for gold?

Gold has had a rock-solid year (pun intended!). It has far outperformed nearly every asset class this year. But under which president will gold fair best?
 

Gold is rocking 2020

Except for some high-flying individual tech stocks and Bitcoin, gold as an asset class has far outstripped the rest this year- rising above $2000 per oz for the first time.
 
Chart: Asset class performance (year-to-date)
asset classes 2020
Source: The MarketEar, October 22, 2020
 
But investing is all about buying low and selling high - so is gold already too high? Maybe. Gold can move up from here but it needs a new catalyst. The environment the next President helps shape and the way they react to global events will impact gold. 
 
For those who look at the 26% rise in the gold price this year and think the metal is automatically headed lower- only because it has gone up - consider this: if gold’s performance after 2008 (when we had the last US economic recession) is rebased to now, there could be a lot further to run.
 
2020 gold price rebased to 2008
Source: Macrobond / Nordea
 
But just because there may be more gold gains to come, it doesn’t mean it will happen right after the election- in fact statistically, the first year a President comes into office is the worst year for gold.
 
gold performance presidential cycle
 

What is driving gold prices?

It's worth keeping the broader context of what is moving the price of gold in today’s market environment. The backdrop for gold looks favourable overall - low rates, money printing, political uncertainty, trade tensions, a recession and the growing possibly inflation. So whoever wins the election cannot immediately reverse all these tailwinds into headwinds, but they might be able to flip one or two.
 
We would list the following driving forces for the price of gold- in order of importance
1. Inflation expectations
2. Bond yields
3. The dollar
4. Money supply
5. Fiscal stimulus
6. Haven status / Geopolitics
7. Metal supply/demand
 
The following chart neatly shows why the top two items on the list were chosen. The return investors get on government bonds when accounting for inflation directly impacts the relative yield disadvantage of holding gold. In other words if rates stay low while inflation is going up then gold is better placed to offer a return than the bond market.
 
gold vs real yields chart
 
With all the above factors in mind, we can try to dissect which candidate might be better or worse for the price of gold though the lens of government policy. So which policy areas will have the biggest impact on the price of gold? We think it boils down to COVID stimulus, infrastructure spending, foreign policy uncertainty and the pandemic health response.
 

The four election scenarios

1. A Biden ‘Blue wave’
2. A Biden win with Republican Senate
3. A Trump win
4. A contested result
 
Let’s go through each one.
 

A Democratic sweep

The focus in markets here is on the size of the likely government fiscal stimulus package. Democrats would not have Republicans pulling down their spending ambitions and could easily push through their first suggestion of a huge $3.1 billion spending bill. This would push up inflation expectations and create even more US government debt which is generally a negative for the value of the US dollar. The flipside of the dollar argument is that at least in the short term, investment dollars may flood into the United States to benefit from the government spending, especially in areas like Green energy.
 

Biden WH, Republican Senate

Biden would have the support of  the House of Representative, but the size of stimulus would have to lowered to meet the needs of the Republican Senate, however the Senate would have less political capital to object to the spending. This is like a watered down version of the blue wave, which would be less bullish for gold from the perspective of higher future inflation and the divided government will generally mean less policy uncertainty.
 

Trump White House

A ‘red wave’ ala 2016 is not even being discussed but remains a possibility and we would argue is less inflationary for gold due to lower spending. It does however, create the scope for a much more hawkish/uncertain foreign policy- i.e. higher geopolitical risk, which favours gold. Trump winning the White House with a Democratic House and or Senate could mean just as much spending as under Biden - Trump is not a fiscal conservative. 
 

Contested result

When we first think of gold we think of it as a ‘fear hedge’ - meaning something to buy in times of uncertainty. The contested result, whereby either candidate wins by a small margin and the other does not accept defeat would be the biggest sources of uncertainty. If we cast out minds back to the year 2000, the result was decided in the Supreme court and George W Bush eventually became president. One might immediately assume this would be the best scenario for gold- and it could well be in the short term -especially if in the absence of a new fiscal package, if the Federal Reserve feels compelled to step in with more monetary stimulus to fill the void.
 
gold vs vix chart
Source: MarketEar / Refinitiv
 
However, gold has not worked perfectly to trade fear in the market. The chart above shows the relationship of gold to the VIX index - also known as the ‘fear gauge’. Oftentimes gold’s role as a haven is short-lived before it rolls over with other parts of the market in a grab for liquidity where investors close positions in gold to cover margin calls in other parts of their portfolio.
 

A final note

The last point is to ask who has been buying gold of late? And who will buy gold after the election? The chart below shows that it has been retail investors that have bid the metal up the most through ETFs. If the motivation them to do so is that the US dollar is being devalued though money printing and excessive government debt- those factors are unlikely to change after the election - they are more likely to intensify.
 
retail investors buying gold ETFs
 
Thanks for reading and happy investing!

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