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Thursday, 29 October 2020

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.


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