Biden win scenario drives reflation and gold focus

Commodities 5 minutes to read
Ole Hansen

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


What is our trading focus?

XAUUSD - Spot gold
XAGUSD - Spot silver
XAUXAG - Gold-Silver ratio
IGLN:xlon - iShares Physical Gold
ISLN:xlon - iShares Physical Silver

____________________________________________________________________________________________________

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.

Source: FiveThirtyEight.com

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.

Source: Saxo Group

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.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992