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During U.S. election chaos, central banks remain accommodative

Commentaries & Views

With investors pricing in a likely Joe Biden presidency to the tune of buying most everything in sight, the Bank of England expanded its bond-buying program this week and the Federal Reserve lobbied for further monetary and fiscal support being required to keep the world’s largest economy from going into recession.

The Bank of England announced it is pumping another £150 billion ($195 billion) into the UK economy after warning of a double-dip recession because of the coronavirus pandemic and an uncertain outlook because of Brexit. The UK central bank said on Thursday that it would keep interest rates unchanged at a record low of 0.1%, but would increase its purchases of UK government bonds to £875 billion ($1.1 trillion).

As expected, Federal Reserve officials kept monetary policy in a holding pattern after the FOMC meeting this week, leaving interest rates near zero and making no change to asset purchases. But Federal Reserve Chair Jerome Powell opened the door to a possible shift in the central bank’s bond purchases in coming months, saying that more fiscal and monetary support are needed as rising Covid-19 infections cloud the outlook for the economic recovery.  

The combination of a potential Biden win paving the way for a larger stimulus package and more Central Bank accommodation has forced the U.S. dollar down to its two-year low, while pushing the gold price back above its 50-day moving average.

Furthermore, following the election on Tuesday, gold began to receive safe-haven bids as President Donald Trump filed lawsuits against five states before the outcome of the election has been revealed, alleging that votes were counted incorrectly.

The President called out election "corruption" and attempts to "rig an election" and "manufacture results" in a White House news conference Thursday, setting up a potentially protracted battle in the courts over the counting and the monitoring of ballots.

"I challenge Joe and every Democrat to clarify that they only want legal votes," the president said. "Because they talk about votes, and I think they should use the word legal, legal votes. We want every legal vote counted. I want every legal vote counted. We want openness and transparency, no secret chat rooms, no mystery ballots, no illegal votes being cast after election day.”

Now that President Trump has chosen to contest the results of the U.S. election, which appears to be headed to a Supreme Court decision that could drag out for several more weeks, I expect gold will continue to be the benefactor of more safe-haven bids. This tightly contested contest for the presidency of the United States is also putting pressure on the Fed to deploy even more monetary stimulus to support the economy under a divided government.  

Meanwhile, there are strong signals that the miners may have made a significant bottom last week as weakness is being bought in the complex. Yesterday, gold rose over $50, strongly reversing election based selling the previous day, while both the GDX and GDXJ closed above their respective downtrend lines from August highs with solid volume.

Moreover, both SIL & SILJ, as well as GDXJ, have been showing positive divergence to the lower low made in GDX last week. When both the silver miners and juniors begin to show relative strength to gold and its miners, this is another strong indication of a possible double bottom having been made in the gold price at $1850.

While anything could still happen in the course of the U.S. election final result, the marketplace is clearly pushing for a risk-on Biden win and a risk-off Trump win. If Biden eventually is declared winner, I expect December Gold to reach the psychological $2000 level quickly despite the perception that much of the impact has already been priced-in. But a surprising turn based on Trump’s claims of voter fraud may lead to a sharp decline in the miners as investors may flee to cash.

Last evening, I sent out a detailed report on an undervalued junior developer that controls a high-margin and shovel-ready gold project to Junior Miner Junky subscribers. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

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