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Gold and US election

22 Oct 2020 02:23 PM

Gold traders are eagerly awaiting the outcome of the US presidential election on November 3rd.

What will happen to gold if Trump wins? And what would happen if Democrat Joe Biden came to the White House?

The current environment is generally good for gold and its traditional role as a hedge against crisis. Low interest rates, expansionary monetary policy around the world as governments grapple with the pandemic, international tensions over trade especially with China, civil unrest in the US, high inflation on the horizon, a weak dollar, and concerns about a second wave of the coronavirus as winter approaches in the Northern Hemisphere – the global picture is chaotic, and is unlikely to improve for some time.

These factors have together driven the precious metal up 26% since the beginning of 2020.

How has gold performed recently?

Gold has held just above $1,900 after weeks of ever-intensifying controversy around the election. This friction should continue to support gold prices in the near term, which will increase the attractiveness of gold as a safe-haven.

After the precious metal hit its highest level in history at $2,074 an ounce at the height of the pandemic, gold prices then fell about 11% and are now steady at around $1,900.

This pattern - a correction then a period of consolidation – is common for any asset that has just exhibited a particularly dramatic rally.

Could the election end gold’s recent sideways movement?

Three scenarios for the election result and what each one means for gold

1) Biden victory, Democratic sweep

If Biden wins and the Democrats retain the House and take the Senate, sweeping changes are likely.

Biden is a supporter of the green economy, which bodes poorly for the mining and oil industries. Biden’s climate plan is estimated to run to $1.7 trillion, with infrastructure improvements worth $1.3 trillion also possible. This spending spree would significantly increase the US national debt, which is already high. Biden may raise taxes on corporations and the rich to compensate.

This would put pressure on the dollar and US stocks - but it would be positive for gold.

2) Democratic President, Republican Congress

In this scenario, Biden wins the election yet the Republicans keep the Senate and take the House of Representatives. This would mean the tax regime established by the Republicans under Trump would be all but impossible to reform, but trade relations would face a smoother ride under a less capricious and volatile president.

This would maintain market stability and decrease uncertainty, reducing demand for gold.

3) Disputed outcome

If there is no clear winner or if Trump refuses to accept a Biden victory, it’s hard to know exactly what would ensue. Trump has stated twice that he believes the election will end in the Supreme Court. This scenario would significantly slow down the process of installing the new president ahead of the January 20th Inauguration Day deadline.

Gold would likely skyrocket along with wider market uncertainty.

In conclusion

Biden's anti-mining policies could hit gold prices, but his policies may also reduce the value of the dollar, which traditionally makes gold more attractive. A Biden win could also push investors away from trading market volatility and seeking safe haven assets like gold.

If Trump is re-elected, his second term would likely still be defined by a US economy ravaged by the pandemic, making predictions very difficult.

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