Global equity markets recovered from the recent blip and returned toward new highs despite a worldwide acceleration in COVID-19 cases. Interestingly Gold also managed to regain the key USD1900 per oz Level even though optimism in equities returned. For investors, TINA (There Is No Alternative) remains, with only stocks and Gold being added to portfolios on a regular basis, especially during price drops.
From a shorter-term perspective, it is clear why. The policies from both Biden and Trump can be considered stock market-friendly. Biden is an old hand, with 8 years as a Vice President in an administration that saw significant market gains. Additionally, the stimulus and power of his flagship economic policy will have markets in dreamland as Ambrose Evans-Pritchard explains:
“The Democrats’ $7.9 trillion blast of extra spending is a step beyond Roosevelt’s New Deal. It mimics the Keynesian expansion of the Second World War and consciously aims to run the economy at red-hot speeds of growth. If enacted in full, it is large enough to lift the US economy out of the zero-rate deflationary trap of the last decade and entirely reshape the social and financial landscape.”
Of course, such massive intervention can only be done by expanding the government’s already bloated finances though that hardly comes as a surprise or a shock to markets these days. Indeed, it is encouraged. And with Biden consolidating his lead in the polls markets are at least trying to look beyond 2020 and pricing in the possibility of a Biden Administration.
The only issue is that many fear that even if Biden wins, Trump will not hand over power easily. For months Trump has raised the issue of postal vote fraud. If there are even one or two cases of such action expect a similar battle in the courts similar to the Bush/Gore debacle twenty years ago. The peaceful transition of power is a vital component in any democracy, let alone the world’s remaining superpower. Any long-lasting damage to the rule of law in the US would once again see the US Dollar weakening and Gold moving up. Markets have already dismissed Trump’s re-election chances, once again. But even he loses marginally then expect him not to concede, and to stand his ground and fight. The Republican Party will need to decide how far to back him, but rest assured they will do all they can if they feel there is a legitimate case.
Only a huge Biden win will overcome this issue. And what has been learned over many elections and referenda in the past years is that polling and market opinions pre-election have very little correlation to the actual result.
Whatever happens in the US, Covid-19 remains the problem of our times. And while popular support for aggressive government restrictions is substantial, there is growing disquiet in many electorates. Away from the sunlit uplands of the stock markets, the real economy is still under severe pressure and it is only a matter of time before unemployment starts to rise. Once this occurs then governments once again will be under immense pressure to either open up the economies or provide huge amounts of stimulus to help the unemployed. Indeed, only last night Trump continued to negotiate hard with the Democrats, threatening to withdraw from stimulus talks. This package was supposed to be in the range of USD1.6-2.4 Trillion. Market’s quickly sold off and they recovered a little. It’s the sign of the times that the world’s most powerful nation requires such gigantic stimulus measures almost every three months in order to keep markets near their all-time highs.
Covid-19 has accelerated the trend of enlarged government intervention in the economy. It is exceptionally difficult to see how this will be reversed any time soon. Especially as governments are almost unanimous in their approach to Covid-19: the economy takes a back seat to the pandemic.
And so until a credible vaccine is tested, distributed and a sufficient number of the global population has immunity the pattern will continue to be cases rise, more restrictive measures imposed, more stimulus passed, and rinse and repeat. The long-term damage to the global economy, to sentiment, to jobs, education and to the survival of the private business is already immense. The longer this cycle goes on for, the worse it will get. And the worse it gets the higher the clamour for more stimulus and support for businesses and the unemployed. Such support can only come from central banks printing money or governments borrowing more. And both of these are usually highly beneficial for the Gold price.
And if the virus does subside quicker than expected, and the economy roars back into life then expect economic activity to ratchet up significantly. Business and individuals will drastically change their lives to adapt to the new world of deglobalisation, work from home and to the experience of living through a Pandemic. And here is where the inflation danger lies. So even if Biden wins there will be no return to the Post-Cold War consensus. The world has changed, nation states are back in control and spending without constraint in a far more volatile geopolitical environment. All this points to continued support for the Gold price.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.