U.S. Presidential Elections and Gold

 The effect of the U.S presidential elections on the prices of gold and the global markets on a whole has been a topic of passionate debate since quite some time now. It is witnessed that the value of the U.S dollar correlates with the price of gold.  Which means that they are inversely proportional- a higher dollar reflects drop in gold prices and vice-versa.

With just a few days to go before the Nov. 3 U.S. General Election, most political pundits have noted that Democratic nominee Joe Biden has a solid lead in national and key state polls. Meanwhile, according to political analysts, it looks like Democrats could flip seven sets and give them a majority.

With the U.S. election just one week away, volatility is rocking the financial markets, except for the gold sector, in which investors remain very cautious ahead of the big event.

Some believe that president Trump will emerge victorious, thus strengthening the dollar and a Biden win will weaken it. 

But as we all know, markets are completely unpredictable and we definitely don’t know how they will react over the election results. 

But still, we can analyse and see what effect each victory will have on gold. 

According to bullion king of India, Prithviraj Kothari, there are four main scenarios investors are preparing for come Election Day —

a) DEMOCRATIC WIN- The most volatile scenario for gold would be a blue wave at the polls with the Democratic candidate Joe Biden winning the presidency and the Democrats getting control of the Senate.

Biden’s regulatory changes are expected to include a $1.7 trillion climate policy and a $1.3 trillion infrastructure improvement plan. These would be great for improving the future of the country, but would drastically increase the national debt at a time when it’s already high. He is also expected to bring in corporate and capital gain hikes and industry regulations. This would put further strain on the value of dollar resulting in higher gold prices and weaker equities.

In a simplistic overview, a blue wave scenario, which is not yet fully priced in, is likely to trigger a lower U.S. dollar and higher gold prices.

b) TRUMP’S VICTORY – Most analysts across the world are of the opinion that if Trump is re-elected to the seat  of power, gold prices would not be affected and would not rally to a high that the market had seen during the pandemic. However, investors as well as analysts are cautious about the outcome of the Senate as a lot will depend on it as well as the economic recovery. The current uncertainty in the global state of political as well as social affairs is helping the price of the gold. Now everything really depends on what the economy is doing at that time and what it needs. If the amount of stimulus the economy gets is on the low side, gold will probably rally, but in a consolidated range.

c) SPLIT CONGRESS- Split Congress scenario means that the fiscal impulse becomes less prevalent, which puts more emphasis on the Fed trying to generate inflation through their mechanisms. This result will bring the Fed more in. gold market will then be looking at what the Fed can do to lower rates. A spilt congress may keep the markets steadier, as the changes will be less impactful and uncertainty reduces. Biden's reign is expected to be calmer, without the unpredictable and random acts of control Mr. Trump is known for. Biden would be more likely to calm trade relations with China and lift various sanctions on foreign countries. This would be great news for the stock market but will reduce the demand for gold as investors will start parking funds into equities.

d) CONTESTED ELECTIONS- Depends on what contested election actually means and how long it will go on for. The reaction in markets comes from how it all impacts the economy. Gold will work as a hedge against that.

It is in the near term that we are likely to see increased volatility, choppy trading and fluctuations in the stock markets and the gold price, particularly in the run-up to US Presidential elections.

The US Presidential election has a historical tendency to influence financial markets as a change in leadership often brings a shift in fiscal policy.

With the Federal Reserve expecting to keep interest rates at the zero-bound range through 2020 and potentially significant government stimulus flooding the markets next year, there is potential for inflation to rise 2.5% or even 3%, which would mean significantly lower real interest rates.

Nevertheless, one observation to apply to the unique situation of present conditions is that gold prices have become more volatile in the 21st century, and it remains to be seen if the trend will hold for the 2020 election as the economic shock from the COVID-19 pandemic clouds the macroeconomic outlook.

Looking out to 2021, investors see gold prices ending the year around $2,400 an ounce.

Gold continues to attract investors

 Gold has always been considered a hedge against inflation, currency debasement and uncertainty. The yellow metal has gained 25% this year, driven by massive global stimulus to cushion economies from the pandemic-induced slump.

In spite of new stimulus measures, the U.S. and global economies are not expected to significantly recover until there is a vaccine for the coronavirus, which some health officials say won't be widely available until the summer next year.

In general, gold still looks positive and strong as it has a long way to go. While COVID-19 cases in the US are levelling off, the disease is still a major concern in countries such as India and Brazil, European cases are rising again, and health officials are worried about combating COVID-19 in flu season. Further, equity valuations seem historically elevated, US-China relations are worsening, and the potentially contentious US presidential election is looming. But growth has rebounded strongly. And with the improved prospects of vaccine approval, top gold leaders in India and analysts at RiddiSiddhi Bullions Limited remain overweight global equities over fixed income.

This environment of meagre growth will keep inflation pressure muted, which means real interest rates might not go much lower than current levels, concerns that a steep rise in COVID-19 cases could lead to renewed lockdown measures and hinder the global economic recovery might extend some support to the USD's status as the global reserve currency.

Gold prices edged up on Thursday after U.S. President Donald Trump reignited hopes of a coronavirus stimulus package before the Nov. 3 elections, but a strong dollar kept the metal's gains in check.

Spot gold rose 0.3% at $1,906.15 per ounce during the trading session. Trump said he would agree to go higher than the $1.8 trillion that the White House has offered in coronavirus stimulus to strike a deal.

Furthermore, even with the government expected to pass a new aid package before the end of the year, the U.S. economy will see only marginal growth until at least the summer of 2021, until the COVID-19 pandemic is under control.

However, once the global economy starts to pick up that is when investors should start to pay attention to inflation fears and that will be an important factor for gold.

Regardless of volatility, some experts recommend holding a gold allocation of 1% – 5% of an overall investment portfolio, and such a position may make even more sense against the current economic and political backdrop. Given the flexibility of the investment, you can hold the precious metal in a myriad of ways that can pay off in the long run. From buying gold-related stocks to the yellow metal itself, even a small position can have a big effect on overall performance amidst an unpredictable market.

Gold remains as volatile as ever. Even (or perhaps especially) in the face of an uncertain future, a little gold in your pocket—and your portfolio—can go a long way.

Gold is going to be driven by the tone of the U.S. dollar. The big move is going to probably occur after the presidential debate when we have a better read on where the polls are going to be sitting.

Another significant aspect that can play a key role in influencing gold prices- with so many UK property companies putting a freeze on withdrawals by investors, liquidity risk is now rising – and not just in the UK.

Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term

The following will play a key role in producing some meaningful trading opportunities fir the yellow metal.

The US macro data

broader market risk sentiment

US stimulus headlines,

Ultimately the macro factors that have driven investors to seek the yellow metal's warm embrace will keep investment capital flowing into gold well into next year.

Markets remain perplexed

Gold has risen about 25% this year, supported by massive stimulus by governments and central banks worldwide as the metal is seen as a hedge against inflation and currency debasement. On and off we have been receiving news that are acting as pull and push factors for gold.

Following suit, last week, markets went in to perplex mode after U.S. President Donald Trump tested positive for corona virus. In spite of the global uncertainties surrounding this news, markets continued it remain bullish for gold as there are many key data releases and events lined up for the week. 

A lot of speculation has been surrounding gold lately. Economic data, stimulus package, presidential debate, China data and now the Trump news- it all seems like a rollercoaster for gold. 

Gold dropped to levels below $1900 an ounce and then managed to pull back and was seen trading around $1900 an ounce on Friday.

The bullion kingof India remarked that it was obvious that Trump’s corona virus news will create panic in the market, leading to uncertainties and pushing gold higher. But there was positive news over the weekend, that Trump has been recovering positively and hence we were expecting gold to stabilise.

Gold inched up on Monday as the dollar weakened, although gains were limited as news that U.S. President Donald Trump, receiving treatment for COVID-19, could be released from hospital boosted risk sentiment. Spot gold was up 0.1% at $1,900.46 per ounce by 0954 GMT. U.S. gold futures were down 0.2% at $1,904.50.

Top gold analysts and top gold dealers in India are of the opinion that gold alone will not be the only one to be influenced. Any news in those lines will also have a direct effect on stocks too.

Gold and stocks are trading together. There is going to be a lot of uncertainty, and there is a risk that investors will choose to liquidate their positions just to protect themselves in case some negative news is releases in the days to come.

It seems that current scenario looks best for speculation. Trump has symptoms but he is recovering positively. News released by the doctors treating him, will surely be a market stabiliser.

With Trump in quarantine for the next two weeks, all eyes will be

• The vice-presidential debate on October 7 between Vice President Mike Pence and Joe Biden's running mate Kamala Harris, according to analysts.
• Federal Reserve's September meeting minutes, this will also be released on Wednesday.
• Any news regarding interest rate hike prospects progress on stimulus package
• In terms of data, there is the U.S. ISM non-manufacturing PMI on Monday and jobless claims on Thursday.

We have always seen that first two weeks of October are always good for gold. Firstly there I sell off post Labour data and in the domestic markets too, gold’s demand rises during the festive season. Gold generally rallies during this time.

And even if there is a fall in prices, investors still consider this dip as a buying opportunity for gold. Both ways, it will be a win-win situation for gold.

Investors believe that gold has the potential to climb back to $1980 over the uncertainties prevailing in the market.