How will the outcome of the US election impact the price of gold moving forward?
Of course, there is no way to know for sure. US politics is just one of the myriad factors that influence the gold market and you never know how things will play out. But there are reasons to believe the future will remain bullish for the yellow metal no matter who ends up sitting in the Oval Office.
As of Wednesday morning, the election was still up in the air. But one thing is clear. It’s not going to be the Biden landslide many expected.
US stock markets rallied Monday and Tuesday before the election on the expectation of a Biden victory and Democrat control of both houses of Congress. This seems counter-intuitive. After all, Biden has promised higher corporate taxes. We know Democrats tend to favor tighter regulations. This hardly seems like an ideal scenario for businesses, and by extension, stocks. But the markets don’t seem to be particularly concerned about the actual economy. It’s all about fiscal stimulus. And most people believe we’ll get the biggest stimulus package the quickest if Democrats control everything in Washington D.C.
But the reality is we’ll almost certainly get stimulus no matter who wins. This economy is built on stimulus. The powers that be will ensure the stimulus spigot stays open. Trump has already said he wants a stimulus package even bigger than Democrats were calling for. And if for some reason they can’t work out a post-election stimulus plan, the Fed will remain poised to inject printed money into the economy. We’ll get more monetary stimulus regardless.
And this is good for gold. Whether the stimulus comes from Congress, or the Fed, or both, the end result is more quantitative easing. That means more inflation. And ultimately inflation is better for gold than it is for stocks.
Historically, the party controlling the White House has had very little effect on the price of gold. According to a World Gold Council Report, dating back to 1971, gold returns were 11% on average per year during Democratic presidencies and 10% during Republican administrations.
Gold returns have been higher in the year following a change of party in the White House, but only marginally. When the challenger wins, gold returns have averaged 6.5% compared to a 7.9% return when the incumbent wins.
The WGC report also points out that while the US is a large market, it is not the sole driver of gold demand. Gold is a global market. The US accounts for only about 7% of physical gold demand. China and India dominate the market, with the Chinese accounting for about 26% of demand and India making up 22%. As the WGC report put it, “There is still a large portion of physical gold demand that is influenced by global dynamics well beyond the US election.”
Of course, American politics does have a major impact on the global economy and world markets, so we can’t simply discount what happens in the US as irrelevant. Nevertheless, the economic dynamics in play won’t shift significantly with the outcome of the presidential election.
Trump nor Biden will wave a magic wand and fix the economic destruction inflicted by government actions in response to the COVID-19 pandemic. The wounds are deep. Neither man will stop overleveraged companies from shutting down. Neither man will put people back to work. All they can do is borrow and spend money – which we’ve already shown is good for gold.
And neither man will alter the monetary policy of the Federal Reserve.
The central bank has already promised it will keep interest rates at zero for years to come. It will continue QE infinity. It has made clear it plans to ignore any inflation threat. And there is no exit strategy from this extraordinary monetary policy. The printing presses in the Eccles Building will continue to churn out dollar bills. It is setting the stage for a major collapse in the dollar and Biden nor Trump will change that.
In my view, that’s the ball you need to keep your eyes on. Presidential politics will be window-dressing. Not irrelevant, but a sideshow. The real action is at the Fed.