Why the November election matters to gold

I am reiterating my bullish outlook on gold. The yellow metal staged an upside breakout from a cup and handle pattern in March. As well, the long-term inflation expectations of ETF (RINF) has been in a steady uptrend. The only question is how far and how fast can gold run?


The future may be bright as gold prices respond to unexpected inflation. The non-partisan Congressional Budget Office (CBO) recently updated its projection of the U.S. fiscal path by raising its FY 2024 estimate of the deficit from $1.5 trillion to $1.9 trillion, driven by emergency spending on foreign assistance to Israel, Ukraine and Taiwan, as well as student loan relief. The long-term picture also deteriorated, the deficit rises to $2.8 trillion by 2034 and debt is expected to grow to 122% of GDP by 2034.


For investors, much of its intermediate-term outlook depends on the outcome of the U.S. November elections and the trajectory of White House policies.



The path to fiscal dominance

The CBO report makes for sobering reading. Not only did the expected FY 2024 budget deficit rise by 27%, projected debt/GDP in 2034 was revised up from 116% to 122%.


It would be trite to say that the fiscal deficit is running out of control. Net interest outlays are expected to dwarf the primary deficit, or actual spending.


This makes for interesting policy choices for legislators and the Fed. Interest expense now exceeds the defense budget. Historian Niall Ferguson warned that the U.S. is starting to look like the late stages of the Soviet Union:
A chronic “soft budget constraint” in the public sector, which was a key weakness of the Soviet system? I see a version of that in the U.S. deficits forecast by the Congressional Budget Office to exceed 5 percent of GDP for the foreseeable future, and to rise inexorably to 8.5 percent by 2054.



The U.S. is on the path to fiscal dominance. It cannot resolve its fiscal challenges without resorting to some form of financial repression. In all likelihood, the Fed will own greater portion of Treasury debt in order to keep interest expense under control.



All eyes on the November election

In the intermediate term, the path of the deficit will depend on the occupant of the White House in 2025. While the Democrats and Republicans have different fiscal priorities, both are expected to expand the deficit. The only question is by how much.

As the Biden Administration is already well-known, investors should have some reasonable expectations of Biden’s economic policy. More industrial policy, such as the IRA and CHIPS Act, more military assistance for Ukraine and Taiwan, more social policy relief, such as student loan relief, and higher taxes for high income earners. Expect the deficit to expand at roughly the pace projected by the CBO under a second Biden term.


If Trump were to win in November, one sure bet would be the extension of the Trump tax cuts that are set to expire in 2025, whose effects were not scored by the CBO as they weren’t legislated. There will be more trade friction. Trump has proposed substituting tariffs revenue and eliminating the income tax.


I have many questions about this proposal. While Trump was vocal about eliminating income tax, he was silent on the payroll tax. Does that mean the payroll tax stays? Tariffs are levied on goods but not services. If a U.S. pharmaceutical or technology company minimizes its tax burden by funneling its profits to an Irish subsidiary which holds the bulk of the company’s intellectual property, would that be subject to tariffs and how does raising tariffs help onshore jobs to the U.S. in such instances? Income taxes are progressive by design, tax rates rise as your income rises, while tariffs, which is a consumption tax, is regressive. Since tariffs amount to a flat tax, tax rates fall as income rises and the burden of taxation falls mainly on lower income taxpayers. The regressive nature of such a regime would be exacerbated if Trump were to eliminate income taxes but not payroll taxes. Such an approach tilts the playing field toward suppliers of capital at the expense of the suppliers of labour.


Another major policy difference between Biden and Trump is immigration. A study from Barclays documented the immigration surge and estimates about 75% of job gains are filled by immigrants. The flood of immigrants has acted to restrain wage gains.


CBO director Phill Swagel analyzed the effects of the immigration surge and projects that lowers the deficit by $0.9 trillion for the 2024–2034 period.

In our baseline budget projections, which account for the immigrants in the surge and their children, the increase in immigration lowers deficits by a net total of $0.9 trillion over the 2024–2034 period. Specifically, revenues will be higher by $1.2 trillion over that period, in our estimation, and spending for mandatory programs and net outlays for interest on the federal debt will be higher by a total of $0.3 trillion as a result of the immigration surge.

One of the planks in Trump’s platform is to restrict immigration. These studies conclude that his policies will put upward pressure on the deficit and inflation.

In all cases, Trump proposals are inflationary. Viewed in isolation, extending the Trump tax cuts set to expire in 2025 would spike the deficit. While the elimination of income taxes could spark an investment and growth boom, which would rattle the bond market, raising tariffs puts upward pressure on consumer goods, which would also spike inflation.


I project that a Biden win would be bearish for bond prices and mildly bullish for stock prices. A Trump win would be bond and USD bearish and gold bullish. The path of equity prices under a Trump Administration is too difficult to forecast as it depends on too many variables.



Electoral expectations

How should investors position themselves ahead of the U.S. election?

The results of the election may hinge on turnout. A NY Times analysis of presidential polls found that Biden has an advantage among engaged voters while Trump leads among less engaged voters. In other words, Biden leads among survey polls while Trump leads in registered voter surveys.


I have long held the belief that market prices have informational content. Here are a few ways of handicapping the election. First of all, RealClearPolitics’ board of betting odds shows Trump in a clear lead, though the liquidity in the betting markets is thin.


As Trump has a history of being a hawk on trade policy, Bloomberg columnist John Authers has proposed that investors monitor the stock price of FedEx, the global transportation logistics giant who would benefit from rising global trade.


The accompanying chart shows the price of FedEx, along with its relative performance against an equal-weighted S&P 500 benchmark, which was chosen to mitigate the recent dominance of large-cap technology stocks. FedEx is mired at the lower end of its relative performance band, which is an indication that the market may be expecting headwinds for global trade.



For completeness, here is FedEx rival UPS, who is showing a similar pattern of underperformance.