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LAWRIE WILLIAMS: The new Biden era – what does it mean for gold?

Joe Biden assumed the U.S. Presidency on Wednesday, thankfully without most of the strongly-forecasted Trump supporting demonstrations occurring around the U.S., nor in Washington DC itself.  The thousands of National Guard soldiers called in, in case of armed dissension, were thus not needed, although there are indications that the outgoing President will not be going quietly.  It is not in his nature.

President Biden has also begun quickly to dismantle some of the Trump era’s more contentious decisions.   He will be prioritising moves to try and bring the coronavirus pandemic under more control, although he may be thwarted in some of his efforts by some recalcitrant Republican state governors and legislators.  Such is the U.S.’s Federal governance system which has mostly served it well over the years.

So what will the Biden Presidency mean for gold?  The yellow metal surged in price immediately on inauguration day, but has drifted lower again in the following couple of days.  Perhaps the sense of normality which seems to have returned following the unpredictability of the Trump Presidency, with its ever-changing retinue of key advisers in top positions, will ‘steady the ship of state’.  Gold seldom thrives on predictability in political action, but it does tend to do so in less certain times.

Martin Murenbeeld’s Vancouver Island-based consultancy, whose views on the path of the gold price we consider among the most accurate, has just updated its gold price projections for the next couple of years.  Interestingly its bullish outlook, although still pretty conservative, outweighs its bearish suggestions quite substantially and suggests that over time gold’s bull run will take out the yellow metal’s all-time inflation adjusted high, which is calculated at $2,852, but not for some years yet.  Murenbeeld’s latest forecast suggests that gold will average around $2,127 by Q4 2021.  An average at this level suggests a peak which is substantially higher at some stage during the quarter, which ties in nicely with our own prediction of an end-2021 gold price of perhaps around $2,225 (see: A $2,200 plus gold price this time next year? Christmas cheer for gold and silver.)

 Nevertheless the Biden Administration still faces numerous challenges ahead, the resolution of which may well prove to be gold positive.  The U.S. itself remains a hugely divided nation politically and that will take a huge amount of time to correct – if ever.   There are still millions of Americans who believe the election result was incorrect, or stolen, after Trump had been claiming this well in advance of election day, over and over and manipulated his supporters to vote in person and avoid postal voting in order to buoy up his proposition that postal voting generated election fraud.  The postal votes were always going to hugely favour the Democrat cause, if only because this sector of the population was far more pandemic-conscious than his Republican-supporting core, and were thus more likely to avoid voting in person to avoid the kind of personal contact that might lead to virus spread.

While his domestic challenges may be significant, so are President Biden’s foreign policy ones.  He will need to rebuild relationships with those normal allies, particularly in Europe, where relationships have been strained.  Policies on Iran, Russia and China still need to be resolved while there remain numerous potential military flashpoints around the world which could blow up at any time.  These global divisions may well be significant for precious metals, but it is the handling of the COVID crisis at home which could be most relevant in the short term.

America remains, despite the seemingly strong equities markets, in perhaps its worst economic downturn since the 1930s.  True some sectors have been thriving as a result of the pandemic and the trend towards working from, and staying at, home – notably in the tech sector.  However other huge parts of the U.S. economy have been decimated with unemployment at levels not seen since the Great Depression.  And things may well get worse pandemic-wise before they begin to get better aided by the enormous vaccine roll-out promised by the new administration.  There is a new virus variant, which is said to be at least 50% more transmissible, only just beginning to circulate and there are still large sections of the American community who are virus deniers and anti-vaxxers.  These people are particularly well represented among the avid followers of former President Trump who seem more attuned to believing the vast array of virus-related conspiracy theories circulating in the U.S.

To an extent, the seemingly irrational performance of U.S. equity markets in particular can be put down to the spread of the pandemic.  Not only is the enormous increase  in people staying mostly at home seen the growth in investment activity via low cost online investment systems enhancing the flow of money into the markets by newbie investors who see markets as only rising.  They have been egged on by high profile investors/commentators like Dave Portnoy, but in our view at some stage this whole house of cards will come crashing down once reality intervenes.  However we have been preaching this mantra since March last year, and the equities markets are still rising, demonstrating our lack of short term perception as far as investor psychology is concerned.  In mitigation we would note that the system has been supported by considerable government monetary largesse in an attempt to suppress the real virus effects on the economy and employment, and it is thought that the Biden administration will not only continue this, but will attempt to further enhance it.

Even so, we still think an accounting lies ahead, but perhaps later rather than sooner!  Ironically the success, or otherwise, of the vaccination programme may be key here, but perhaps not in the way many think.  If the vaccination programme is seen to be successful, even in part, any continuation of government subsidies will likely be withdrawn which will serve to bring home the long term damage to the country’s basic economy and permanent unemployment levels caused by the pandemic.  So, instead of markets rising on this kind of news, when it comes, which it may do initially, there could well be a medium to longer term fall as the country struggles to repay its debts and the economy starts to understand it is a very long term path to any real recovery.

So what does this mean for gold and/or precious metals in general?  We still remain gold and silver positive.  The Biden increased stimulus, if it passes through both houses of Congress which now seems probable, although it may be slower in coming than the administration would like, should boost investment in both equities and precious metals as yet more money should flow into the markets.  While equities may benefit most from this initially, as the realisation dawns that the pandemic may get worse before it begins to get better, we suspect that more of this stimulus money will start flowing into safe haven elements among which gold and silver rank highly. As these currently account for a relatively small part of the total investment universe they should benefit more in percentage terms than other investment options.

Inflation is the other factor which could come into play.  The U.S. Fed appears to have upped its inflation target to an average of 2% which, admittedly, it has been finding hard to achieve.  But a 2% average when existing inflation on the Fed’s own calculations is currently consistently well below this level, suggests it may be aiming at a period of perhaps 3% inflation.  But if it succeeds in driving inflation up to this level will it be able to control it?  Some observers feel that even 3% inflation could be disastrous for the U.S. economy in its current fragile state and lead to a sharp fall in the dollar index unless other key economies follow suit in also generating increased inflation.  Should they do so this suggests a rising gold price in all currencies, and where gold goes silver tends to follow, or even usually exceed it in price growth.

23 Jan 2021 | Categories: Gold

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