Regardless of who wins this election, an increase in the fiscal deficit is certain. This condition alone bodes well for gold and silver prices, says Navneet Damani of Motilal Oswal Financial Services.
Gold and silver have given a powerful performance this year amid the pandemic and global uncertainties. Though after a sharp surge some consolidation was witnessed in the last quarter amid easing uncertainties, teh buzz around the vaccine, negotiations on the COVID relief bill and updates on the US presidential election.
Negotiations on the relief bill have been going on for some time without any conclusive output, on the other hand, the polls show a very clear bias towards Joe Biden, there is a lot of speculation and confusion over who will be the next leader of the world's largest economy.
While many events are normally lined up on the US economic calendar, no event occupies national attention like the presidential race, for good reasons. In this report we will briefly try and evaluate the consequences of a Trump and a Biden win to appraise what it might mean for the owners of precious metals.
History shows that the US presidential election influences financial markets as a change in leadership often brings a shift in the fiscal policy. Tracking the performance of gold prices during election years may help to shed some light by looking at the average performance in the year preceding and following elections since 1980.
The precious metal normally rallies at the start of the year but consolidates in the second-half to trend lower in November.
Background check for gold
Regardless of who ultimately wins this election, an increase in government financial deficit is certain. This condition alone, without the added benefit from either candidate's policies, bodes well for gold and silver prices in nominal terms. Increased debt, excess liquidity, COVID-19 relief bill (if it's not passed before the election), rising COVID cases, central bank policy stance, lower bond yields, trade war uncertainties and other concerns will be very much in place even after the election is over.
These factors have supported yellow metal in the past and will do so in teh future too. Even if these issues were to unwind, the market will take some time to get over the spillover effect of the same.
In addition to these events, silver is an industrial metal, too, and the prospect on that front are also very supportive. If we look at the policies of both the candidates, President Donald Trump and former Vice President Joe Biden, they have a common goal of providing liquidity and developing the economy, this will boost demand for the metal, increasing the prospect for silver.
Based on the outcome probabilities, Biden making a clean sweep seems more likely, though like the previous election, things can turnaround anytime. After the elections, things that are in buffer like the COVID-19 relief bill will need some clarity and also the trade uncertainty with China will also be an important aspect to look out for. If Trump is re-elected, tensions on that front could increase, supporting gold prices. Biden's stance is not very clear to the market but he might try to make amends with China and get everything under control.
Wall Street could see a surge, if Trump wins, ascertaining the initial move for gold just like previous elections. Though apart from the trade war and other factors, the initial move of gold could be restricted in a range but overall policies of both the leaders favour gold in the long run.
In the short term, Comex gold form a base around $1,880 – 1,840, while rallies are likely to be capped in the range of $1,940 - $1,975. Similarity on the domestic front, dips towards Rs 49,500-48,500 per 10 grams is a good range to buy with short-term upsides being capped around Rs 52,200 - 54,000. In the long term, both candidates are likely to benefit gold and we continue to maintain our target of $2,500 on the Comex and Rs 65,000-67,000 on the domestic front.
(Navneet Damani, VP – Commodities Research at Motilal Oswal Financial Services.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.