The stock market is riding high, taking Joe Biden’s widening lead in the polls as a sign to discount the odds of a contested election. But some investors say it’s too soon to count out turmoil just yet, and that gold is poised to benefit from the uncertainty.
Fears eased this week that the election would fail to produce a clear winner, with traders pointing to polls suggesting a stronger lead for Democratic hopeful Mr Biden. The possibility of a close vote and messy aftermath had made markets nervous in recent weeks while bolstering hopes for haven assets such as gold.
Strategists including those at State Street Global Advisors and Invesco say heated rhetoric and still-simmering worries about the possibility of a protracted battle over the outcome will reinvigorate demand for the metal after its rally stalled last month. Concerns on President Donald Trump’s prognosis after testing positive for Covid-19 only add to the uncertainty.
“Despite some polls indicating Mr Biden’s lead is widening, I would not assume the risk of a contested election has dropped, although I know that’s what many are concluding,” said Kristina Hooper, chief global market strategist for Invesco Advisers, which manages $1.1 trillion for clients. “A lot can happen between now and the election, and I do believe gold can benefit from it.”
Bullion, which surged 30 per cent through the first eight months of 2020, lost momentum in September, posting a second straight monthly decline and its biggest since 2016 as dollar gains sapped the appeal of the metal. There are signs demand is starting to mend, with prices extending gains after the best week since early August on prospects for US stimulus and continued low interest rates.
Risks surrounding the election may “be under-appreciated by precious metals markets,” according to Citigroup. The bank said in a report late last month that those concerns could help push bullion to a record by year-end.
“Gold thrives on uncertainty: we’ve never had an election in my experience in the US that is as uncertain as this, and as uncertain a political environment as this,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors, the marketing agent for SPDR Gold Shares, the biggest exchange-traded fund backed by the metal.
Growing tensions in the run-up to the contest were underscored by an unusually contentious debate last week between President Trump and Mr Biden. Markets had been girding for a possible disputed result after President Trump last month wouldn’t commit to a peaceful transfer of power were he to lose the election. The Cboe Volatility Index, or VIX, has risen for six straight sessions, the longest run since 2018.
“We’ve been fooled by the polls before, so there remains a lot of uncertainty around the outcome,” Wayne Gordon, executive director for commodities and foreign exchange at UBS Global Wealth Management, said on Bloomberg TV. “Gold is still an excellent diversifier within the portfolio context for people wishing to hedge against these uncertainties we have coming towards us.”
Mr Gordon recommended buying gold in March, when the metal was plunging as deep losses in risk assets forced some investors to sell gold to raise cash. Since that call, prices have jumped more than 30 per cent.
There are potential headwinds for gold that could keep its rally sidelined, including a slowdown this year in demand for the metal from central banks and a dollar that proved resilient in September.
But while the US election season poses the greatest political risk, it’s only one of a raft of potential drivers that are likely to underpin investor interest in gold, according to Commerzbank. Those include Brexit, rapidly rising national debt levels, economic stimulus and extremely low interest rates, the bank said.
Michael Cuggino, president and portfolio manager at Permanent Portfolio Family of Funds, sees gold “increasing in value regardless of the election outcome” over the longer term.
“As long as real interest rates are negative across the curve, more liquidity is provided by the Fed and Congress, and growth resumes in the US and abroad post-Covid, inflation expectations will be heightened and gold should continue to rise, albeit in its traditionally lumpy fashion,” Mr Cuggino said.
In the meantime, the focus for gold over the next several weeks will stay on the US election. President Trump has called universal mail-in balloting, where states automatically send a ballot to every registered voter, “rigged” and “unfair”, stirring worries about a prolonged dispute over vote tallies.
“This time around, it’s a little bit different,” said Darwei Kung, head of commodities and portfolio manager at DWS Group. “It’s not just the outcome of the election, but the process of the election, that sort of uncertainty.”
