Hedging Election Uncertainty with Gold
Today the results of the election are at least as uncertain as they were on election night; perhaps more so. While the media called the election early for Joe Biden, there has been evidence of fraudulent voting, and malfunctions of vote tallying software that have had a notable impact on the election outcome. Some states that initially indicated a Trump victory, were officially credited to Biden, but are now being revised back to Trump’s favor pending a recount. This has created confusion and uncertainty in a process that could be considered comical, if not so sad. Obviously there are many Americans that preferred the Biden ticket, and many that preferred the Trump ticket. But hopefully a majority of Americans from both sides can agree that the election process should be fair and provide an accurate rendering of the will of the American people. Apparently, this did not happen this time. Nevertheless, clear implications for Gold and Silver are easily discernible.
As discussed previously here, those that correctly called the 2016 election still believe President Trump will be re-elected. Those in the Joe Biden camp seem just as adamant that they have/will receive the nod. For those of us on the outside looking in, it appears to be a toss up until we see how extensive the questionable voting was. Perhaps we can look at what impact the policies and actions of each candidate will have if/when they are elected, and what impact will be felt in the precious metals sector regardless who wins.
Biden Administration Impact
A Biden Administration would be more likely to be in favor of bailing out bankrupt cities and states with federal money. Of course this would require the cooperation of Congress and the Senate, which is uncertain at this point. Some of the same discrepancies with the Presidential election are also being worked out in Congressional and Senate races, and it is not currently known which party will be in control of the legislative and executive branches of our government. In the days leading up to the election, Mr Biden began intimating that “there are not red states or blue states, only the United States”. Generally speaking, Americans are normally in favor of helping out other areas of the United States when tragedy strikes in the form of a weather event or natural disaster, such as a major hurricane or tornado. But sometimes a distinction is drawn when the calamity is judged to be self-inflicted.
An example of this can be seen in the neighboring states of Missouri and Illinois. Missouri has a state work force and cadre of school teachers that earn a modest income during their careers, and a financially sound retirement plan that pays a similar income during retirement. Illinois generally pays higher wages to state and municipal employees, and teachers. They also offer an ever-expanding retirement package that pays retirees more in retirement than employees earn while working in Missouri. The problem is, Illinois is nearly bankrupt, and has to borrow billions of Dollars each year just to pay retirees (let alone operate the government). A federal bailout of Illinois state pension plans would mean Missouri retirees have to pay extra tax while earning less, to allow their Illinois counterparts to retire with rich benefits they couldn’t afford to provide for themselves. Democrats tend to be in favor of such bailouts, while Republicans generally balk.
But if we assume a Biden victory, with the Democrats maintaining a lead in Congress and winning a small majority in the Senate, federal bailouts of bankrupt cities and states would probably be in the cards. This would involve the creation and distribution of more currency, and an increase of deficit spending beyond the massive amount currently being spent. This provides an even greater boost to precious metals prices, which cannot be printed or conjured out of thin air.
Trump Administration Impact
A Trump administration post election would probably deal with bankrupt cities and states a different way. They would be more likely to demand concessions, such as revised benefit schedules that would reduce retirement incomes to the levels of those being asked to help pay for the benefits of neighboring states. While a bailout of some sort would still be offered, the amount of currency and deficit spending required would likely be less. But this doesn’t mean there would not be more deficit spending going forward. Regardless of the bailout provisions pertaining to insolvent state and local retirement plans, there is an additional round of “Covid 19 Stimulus” payments already on the table to be worked out. This is likely to be an additional $1-3 Trillion, regardless of who wins control of the Presidency, Congress, and Senate. With the currently divided House and Senate, compromise seems centered around a $1.8 Trillion number. This would indicate that future Republican control might be closer to $1 Trillion, and future Democratic control leaning closer to $3 Trillion.
Meanwhile, demand for physical Gold and Silver continue to increase. The number of physical deliveries for Gold on the Comex is up over 400% so far in November, compared to previous years. We have also seen Billionaires and hedge fund managers stepping into the precious metals arena, while also selling positions in the banking sector. Why would they sell positions in what has previously been a “cash cow” (bank stocks), paying dividends, in exchange for precious metals? Cash becomes less attractive, when the value of cash is brought low by means of devaluation. As we have discussed often, the value of cash when compared to Gold over time loses purchasing power fairly consistently. Combined with the sting of low or negative real interest rates, and a stock market perched dangerously near all time highs, Gold and Silver offer reasonable stability and purchasing power protection.
What Do We Do Now?
Some have expressed a concern about the recent rise in precious metals prices, and if it is wise to purchase now. While we will likely see fluctuating prices daily, the “trend is your friend”, so to speak. With the level of uncertainty out there today on the economy, the virus, and something that should be simple (election results), I believe we have already seen the lows for the year. In upcoming projections, we will look at what 2021 and beyond may hold. I would recommend owning Gold and Silver, as the outlook for precious metals has more opportunity than danger, compared to other asset classes.