Best-case vs. worst-case election scenarios: Why gold price wins either way
(Kitco News) Markets fear uncertainty and there is plenty of it on the table with the U.S. election less than two weeks away. What does it all mean for gold? Analysts say that even in the worst-case scenario, gold will see higher prices by year-end.
Whether the U.S. will get its best-case or worst-case scenario come Nov. 3, one thing is clear — gold is in a bull rally that is not going away anytime soon, analysts told Kitco News.
"Either way, gold is technically and fundamentally still very bullish. We've had three months of consolidation. It got a little bit overbought in August. But the fundamentals are still very positive — rising debt-to-GDP ratio, rising QE, the potential peak in the U.S. dollar, and bottoming of stock market volatility," Bloomberg Intelligence senior commodity strategist Mike McGlone told Kitco News on Tuesday.
One thing markets are fully aware of is that the U.S. economic situation is still very fragile with Federal Reserve Chair Jerome Powell warning markets in October that not enough stimulus could potentially reverse that recovery.
The two scenarios examined here is a Democratic sweep that would involve massive new stimulus measures and a contested election that could see delayed results and potential political chaos.
Best-case scenario: Democratic sweep
The best-case scenario for gold seems to be a clear Democratic sweep at the polls, according to analysts who see Joe Biden spending more. And, according to the latest market polls, this is a fairly realistic outcome at this point.
"I think it will be a Democratic sweep and that should be good for gold. We should get a decent fiscal stimulus and there is a good chance that the Fed will buy most of that fiscal stimulus, which means additional QE. And both of those are very good for gold and potentially bad for the dollar," said McGlone.
For gold, the best-case scenario would be a blue wave, which would see Joe Biden winning the presidency, the Democratic Party flipping the Senate, and holding on to the House, confirmed TD Securities head of global strategy Bart Melek.
"The Democrats on average plan to spend $5.6 trillion over the next couple of years and that ultimately means that much of that will be funded by central bank printing," Melek said.
The more money is pushed into the market, the better the environment for gold due to higher inflation expectations, he explained.
"Over the next two years, you could see significantly higher deficits with the debt-to-GDP ratio growing. Right now, we have more debt than we did during WWII. The question is, how do we pay for it? I suspect we pay for it, not by taxes, but we pay for it by generating negative yields, where nominal growth is significantly above the interest rate," Melek pointed out. "We can have inflation significantly above 2%, and over time, this is how you erode the real debt balances. By definition, this is a debasement of money. If that's what happens, then there is a good case for gold moving still higher."
Markets are currently starting to price in a Democratic win. However, a full Democratic sweep could still shock the markets, McGlone added. "A blue wave at the polls is not fully priced in because of what happened during the last election. The markets were really shocked. Now the market is waiting for the facts."
Important to highlight that a Donald Trump win is also good for gold, with analysts saying that gold will run higher under either of the candidates.
"Regardless of which presidential candidate gets in, gold will ultimately be going higher. Both candidates will be spending money, and that is bullish for gold," said Phoenix Futures and Options LLC president Kevin Grady.
Economists at Capital Economics also see gold making new gains no matter who wins the election on Nov. 3.
"Regardless of who wins, inflation expectations are ticking up. We could see $2,000 an ounce gold by the end of this year and $2,100 by the end of next year. More generally, gold prices will stay high for an extended period of time," said Capital Economics commodities economist James O'Rourke.
Worst-case scenario: Contested election
The worst-case scenario would be a contested election, according to analysts, who don't rule out this possibility amid a very polarized landscape in the U.S.
JPMorgan warned investors this week the Democratic presidential nominee Joe Biden's lead in the polls is shrinking. The betting markets are pointing to the possibility of a contested election. A higher risk of a contested election could delay stimulus and "likely put some downward pressure on risk markets for the near term," JPMorgan said in a report.
Back in 2016, markets were surprised when Trump won, which is why many investors are choosing to stay on the sidelines until the results are clear, the analysts said.
"There could be a contested election. You could have a scenario where on the day of the election, Trump leads, but then as the mail-in votes come in, that could tip the balance against him, and he may not accept it, saying that there were irregularities and it goes into court. There is also a potential that certain states might look at irregularities and may certify the election," said Melek.
Part of the worst-case scenario has to do with the increase in mail-in votes as more people prefer to stay home amid the resurgence of coronavirus cases in the U.S.
Thus, come the morning after the election, markets might not even know the results yet, or how many people voted, or even when all the votes will be counted, according to analysts.
"The key will be the logistics on election day. There has been a huge increase in mail-in voting, but a lot of states don't allow those ballots to be counted until the physical polls have closed. There is a concern there that we might not know the result as quickly as we normally would on the morning of the 4th," said Capital Economics senior U.S. economist Andrew Hunter.
Trading the election day will also be problematic as the markets will want to know the results right away, said Pepperstone head of research Chris Weston.
"Ultimately, the quicker we can get an outcome, the quicker business community can understand the investment landscape they can work in," he said. "The more uncertainty drags on, the more fearful the markets will be."
One of the issues for the gold price will be how the current president handles the transition if the Democrats win, said McGlone.
"During any type of unusual discombobulation in election, gold is a value asset. If that hurts the stock market, it might initially pressure gold, but overall, gold is a safe haven, and it will typically help the safe haven," McGlone said. "We all know gold went down early in the year when the stock market went down, but it bounced right back. Gold is in a more enduring bull market than stocks at the moment."
Public reaction to an unclear winner is also a big unknown at this point, said Melek. "What will public reaction be? Will there be rioting? You just might want to get out of everything," he noted.
Large-scale rioting or civil unrest could lead to a market selloff that could drag gold down with it on a temporary basis. "This could create liquidity issues," said Melek.
Another issue with a contested election is whether or not the public trusts their electoral processes, said Grady.
"Uncertainty around the election is a problem. If you don't trust the electoral system, that is a problem," Grady pointed out. "There is definitely a chance for friction. We saw the last time around that the polls can be wrong. I wouldn't be surprised to see a much closer election. Right now, the U.S. is so polarized."
On top of that, the rising coronavirus cases and mail-in ballots are causing more confusion, Grady pointed out.
"A lot of people don't trust the mail. Would you take $5,000 in cash and mail it to yourself? We are starting to see more and more people going to polling sites, and you are seeing two-hour delays to drop off the ballots. There are definitely a lot of people in the country unsure how this is going to work," he added.
Betting markets indicate that some investors are hedging a contested election to an extent, noted Weston. And in case it happens, some people might be looking to sell gold in the short-term, but any real damage caused to the economy in light of this will benefit gold in the long-term.
"If Trump doesn't accept it the results, the prospect of civil unrest is high. It doesn't take much to cause unrest. Markets would only get concerned if a contested election meant a hit to economics. At the end of the day, gold will work as a hedge against that," Weston said.