Gold rates in the last five trading sessions have swung volatile. At the start of the week, the markets traded well above the $1,900 level. This was way below $2,000 levels that the Gold market scaled in August.
By mid-week, the trend moved to sub $1,900 levels. On Saturday, the markets traded in a range between $1,850 and $1,880 per ounce.
For markets, the US elections and fiscal stimulus are two essential factors. movement was certainly surprising.
Even, the London Bullion Market Association (LBMA) rates that jewellers and associations across the country keep a track of, reported at $1,881.85 per ounce - a decline.
From an Indian context, the Rupee has weakened in the last few trading sessions. On Saturday it quoted levels of 74.551 indicating a weakness.
With Diwali and Laxmi Puja, barely a fortnight away, most investors and buyers of Gold would be anxious to know about where the Gold rates are headed next. And, the constant murmur across messaging boards is clear - Will a Biden or Trump victory impact Gold rates?
The Polls at United States are fast approaching. The election remains the most consequential election in recent history. As impactful as the last one with President Donald Trump making a victory. The Covid-19 pandemic, a historic recession and the policy response to it is what makes this a high stakes election.
With Trump's emphasis on America First policies having shaped the global economic and geo-political environment over the last few years, investors globally are awaiting the election outcome with bated breath. After all, the winning candidate's policies will drive financial markets over the next several months.
So what are these key policies and why are they so significant?
Optimism about a quick economic recovery that has driven US markets to record highs post March, seems to have waned. There is a good possibility that markets overpriced the rebound in the economy incorrectly interpreting a bounce from the bottom as a V-shaped recovery. Latest economic data suggests that the greatest benefits of the rebound may be behind us.
Another round of stimulus by the US government is thus seen as vital to support the pandemic-stricken economy. Without additional spending from the government, there are growing worries that the economic recovery will slow as many of the stimulus programs have expired, curbing consumer spending.
While both candidates agree on spending, the areas of spending and the source of funding could differ; thus impacting deficits.
Another important policy factor for financial markets will be taxes. US equity markets had celebrated the tax cuts passed in 2017, which bolstered corporate profits. With a Biden Win, the reversal of these tax cuts, especially as the economy struggles with a recession, will thus be unfavourable for financial markets, fueling risk aversion.
Relations between the super economies have worsened this year, with the pandemic aggravating trade and technology disputes. Both are at odds on almost every front - Beijing's handling of Covid-19, forced technology transfers, human rights abuses and China's tightening grip on Hong Kong.
In fact, POTUS has threatened that the U.S. could pursue a "complete decoupling" from China. Bilateral trade between the economic giants had already decreased by 15% in 2019 on account of the trade wars. A further disengagement could damage global economic recovery at a time when international trade is already in the doldrums.
Also, there are lingering concerns that these disagreements and attacks could quickly snowball into a geostrategic and military conflict with dire consequences for world order.
With US leadership and policies shaping risk sentiment and swaying global markets, here are factors that are likely to impact gold price?
While most polls show Joe Biden in the lead, it is futile to try and predict the electoral result. That's why we've done an analysis to try and understand what could be the implications for gold in each of the following scenarios.
The economic policy of the Trump administration was characterized by tax cuts, additional spending and trade protectionism to boost growth. This was the strategy when the US economy was riding strong on a record 10 year gradual economic expansion. So there's little chance of a change in policy stance now when the economy is struggling from the effects of the pandemic. We can thus expect the status quo in terms of policy if Trump is re-elected. While spending and continued lower taxes will augur well for financial markets, Trump's America First agenda and resulting hostility between US and China will have a destabilizing effect on markets, which will benefit gold. A status quo will also mean continued support from the president for a second round of fiscal stimulus. This will increase deficits further and thereby weaken the dollar and push up gold prices. All this is of course assuming that Trump's Republican party also takes control of the US Senate. Without which decisions on policy matters will be slow to move.
This outcome will be similar to the incumbent president as far as fiscal policy is concerned. In fact under Biden, we can expect more infrastructure and public health expenditure as well. But corporate tax cuts would most likely be reversed, hurting corporate profits and financial markets in the near-term. And with higher taxes funding the spending, the deficit could go down over time. In addition, Biden's China policy looks a lot like Trump's which suggests that frictions between the two countries will continue even after a change of leadership. This scenario will be favourable for gold prices. This is again assuming that the president and Senate are not of conflicting parties.
After repeatedly suggesting that the election be postponed, citing postal voting is susceptible to fraud and could lead to inaccurate results, President Donald Trump has now indicated that he might not peacefully transfer power if he loses to Joe Biden. If that happens, it could undermine the quality of political systems and governance in the US, and raise questions about the stability of the US government and the dollar.
The potential for political chaos and uncertainty following the election will be a bigger risk for equity markets than who actually wins the vote. Investors should brace for market turbulence not just till election day, but for weeks after that incase of a contested election. This will be a catalyst for gold prices to move up.
In summary, for gold investors closely tracking the US elections, it is evident that irrespective of who wins, a big economic stimulus is on its way and US-China hostility is here to stay. This will continue to fuel gold prices for the foreseeable future.
Disclaimer: Views expressed are solely that of the author and should not be construed as an offer or advice to buy Gold or precious metals. The article is solely for information purposes and is not a replacement for professional advice from a certified market analyst. A Sify staff has modified the flow of content and the headline. Ghazal Jain is an Associate Fund Manager with Quantum Mutual Fund.