(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.
Source: Anna Golubova | Kitco News
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