Biden win scenario drives reflation and gold focus
Head of Commodity Strategy
Summary: The strong performances seen in gold and silver so far this year look set to continue into the final quarter and beyond. A gold and commodity supportive reflation trade is once again receiving a great deal of attention with long bond yields and small cap stocks on the rise while gold has returned back above $1900/oz. Driving these expectations are an increased chance, according to the latest polls, that Joe Biden will defeat Donald Trump on November 3
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The strong performances seen in gold (+21%) and silver (+27%) during the first three quarters increasingly look set to continue into the final quarter and beyond. The risk of rising inflation has been one of the major themes behind our bullish outlook for gold, and one that has increasingly been grabbing the attention following the events in Washington during the past week. Trumps dismal performance at the first presidential debate and the subsequent Covid-19 illness have seen Biden pull away in the polls.
As my colleague John Hardy writes in his latest FX Update: “The argument here is that the Democrats are set to take back the presidency and the Senate, therefore paving the way for a massive multi-trillion stimulus passed in the first one hundred days of a Biden administration, taking US inflation much higher while leaving the Fed policy rate pegged near zero. The US dollar has clearly been driven by the market’s pricing of future inflation. The Biden argument seems the more plausible driver here, and US rates spiked all along the curve, but most aggressively at the long-end yesterday, with the 10-year trading above 0.75% resistance and the 30-year above 1.50%, a notable chart level. Also, the stronger the apparent edge that the Democrats are achieving in the polls, the less likely that Trump’s claims of a fraudulent election will be able to drive “contested election” uncertainty for any appreciable length of time after Election Day.”
The recovery back above $1900/oz following the recent correction to $1850/oz is signaling the rally could have further to go, not least considering the continued and strong demand for exchange-traded funds backed by bullion. Investors, asset managers and pension funds are increasingly waking up to the need for tail-end protection against inflation and it has led a continued increase throughout the year to the current record above 111 million ounces. Most noticeable was the continued inflows in August and September despite falling prices in both months.
From a gold perspective the yield rise has if anything been supportive with the rise in nominal yields primarily being fed by rising breakevens thereby leaving real yields close to unchanged. Real yields look set to fall deeper into negative territory as breakevens rise, not least considering the Federal Reserve’s attempt to keep nominal yields capped.
Whether or not gold is ready to embark on a fresh drive back towards $2000/oz remains to be seen. Not least considering the amount of reflation and a Biden win that by now has been baked into the price. The surprise Trump win back in November 2016 saw gold drop by 15% before hitting a through in mid-December that year. However, with the novelty value of his behavior gone, Trump’s chances of repeating his astonishing comeback from behind are likely to be lower this time round.
Some investors may nevertheless want to postpone an investment decision until after the election given the potential for increased volatility and market uncertainty. For the time being gold is stuck between the 100-DMA at $1858/oz to the downside and the 50-DMA to the upside at $1944/oz.
Finally staying with the inflation theme and in this case the worst kind. Following the biggest quarterly surge in food commodities since 2016, the market awaits the monthly Food Price Index released by the United Nations Food and Agriculture Organization on Thursday. The index which tracks prices of more than 70 food commodities is likely to show another jump after hitting a six-month high in August.
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