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Biden or Trump? This Asset Will Rise
Although traders can argue until they are blue in the face as to who will win the 2020 Presidential election one asset is almost certain to rise regardless of whether Joe Biden or Donald Trump lives in the White House.
Whether Democrats or Republicans rule for the next four years they will each face trillion-dollar fiscal deficits, political turmoil, and continued yield curve suppression by the Fed – all perfect ingredients for a further rally in Gold.
Gold has seen a near 70% rise in value over the past 2 years rallying from $1200 to $2050/oz before retracing some of its gains ahead of the US election. The near parabolic rise may be due for a pause but we doubt that the rally has peaked and the yellow metal could target $2500/oz over the medium-term horizon.
Gold rallies associated with explosion in inflation or political instability
Generally, gold rallies are associated with an explosion in inflation or political instability. In times of turmoil investors always turn to the oldest store of value in the world in order to preserve their wealth. Given the current turmoil not only in the US but across the world, it is quite likely that the US could be tipped into a geopolitical conflict with China most likely over the status of Taiwan.
The threat of military confrontation between the world’s number and number two economies will without a doubt send markets into a tailspin and have investors rushing for the safety of gold. But does not need such a dramatic scenario in order to prove its value as an investment.
Gold will rally from the slow bleed of US Finances
Instead it far more likely that the Gold rally will get a boost not from any geopolitical flashpoints but from the slow bleed of the US finances. With the US budget running a fiscal deficit of 1 Trillion dollars for each of the next four years running the pressure on the US dollar and on the Fed will likely increase. Typically higher budget deficits would require higher rates in order to attract investors but with the Fed focused on keeping rates low in order to stimulate growth the US yield curve has become unnaturally suppressed resulting in negative interest rates as the nominal rates remain well below inflation.
And negative rates
Aside from panic, negative interest rates are the single greatest driver of trade in Gold because they help eliminate its biggest flaw – namely lack of any yield on the asset. Since gold by its very nature is not an income-producing asset, its value increases as competing assets such as bonds provide negative streams of income.
The Fed has already stated that it does not intend to raise rates for the foreseeable future. In Chair Powell’s famous words, the Fed is “not even thinking about raising rates” with US monetary officials hinting that a low rate regime will last for the next two years at least. Such conditions are fertile soil for further gains in the yellow metal especially if it trades through the $2100 level leaving the key $2000 level in the dust momentum alone could propel it towards the $2500/oz level.