Donald Trump or Joe Biden: Gold prices set to go up

October 30, 2020 1:15 AM

Whoever wins, a big economic stimulus is on its way. This will weigh on the dollar and fuel gold prices

This will increase deficits further and thereby weaken the dollar and push up gold prices.This will increase deficits further and thereby weaken the dollar and push up gold prices.

By Ghazal Jain

The United States is fast approaching its most consequential election in recent history. As US leadership and policies shape risk sentiment and sway global markets, gold investors want to know what will be the likely impact of the election on gold prices.

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.

A Trump victory
The economic policy of the Trump administration was characterised by tax cuts, additional spending and trade protectionism to boost growth. There’s little chance of a change in policy stance now when the economy is struggling. We can expect the status quo in terms of policy if Trump is re-elected. While spending and continued lower taxes will augur well, Trump’s ‘America First’ agenda and resulting hostility between US and China will have a destabilising 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 assuming that Trump’s Republican party takes control of the US Senate, without which decisions on policy matters will be slow to move.

A Biden victory
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 will be favourable for gold prices. This is again assuming that the president and Senate are not of conflicting parties.

A contested election
After repeatedly suggesting that the election be postponed, citing postal voting is susceptible to fraud and could lead to inaccurate results, Trump has now indicated that he might not peacefully transfer power if he loses to Joe Biden. If that happens, it could 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, 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 weigh on the dollar and fuel gold prices for the foreseeable future. With the recent fall in gold prices, it is a smart time to be buying the metal to benefit from the upcoming strengthening of prices. We recommend that investors use this correction to build 10-15% allocation to the metal.

The writer is associate fund manager, Alternative Investments, Quantum Mutual Fund

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