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Some interesting and eyebrow-raising developments are in the making for the bull case in gold. Some developments are very short-term and some are longer-term structural developments.
A large short-term catalyst for gold prices is the prospect of a contested election outcome that drags on for several weeks. There are multiple views being cast about by high-profile investing gurus as to what this scenario may look like.
The most notable opinion rendered was that of global veteran investor Mark Mobius. Mobius is hailed by Bloomberg as one of the 50 most influential investors in the markets anywhere in the world.
A contested outcome in the U.S. presidential election could cause a “dramatic fall” in the stock markets, Mobius warned on Oct. 16 in an interview with CNBC.
“That’s a real issue and a real problem,” Mobius, founding partner of Mobius Capital Partners, told CNBC’s “Street Signs Asia” in response to a question on the implications of a disputed election, in which the eventual winner is not finalized until weeks or months after the Nov. 3 vote.
I truly hope, as do most Democrats and Republicans, that Election Week doesn’t turn into Election Month or worse. The last time the there was a contested Presidential election was in 2000, when George W. Bush beat Al Gore for his second term, but not after a bitter legal battle settled by the courts.
The market responded negatively as the S&P 500 index fell 8.4% between election day on Nov. 7 and Dec. 15, the day after Gore conceded in the wake of a Supreme Court ruling that ended the recount. Gore actually won the popular vote but lost the electoral college vote. Punch card voting ballots were summarily eliminated from the Florida election process and the national election process by 2014.
What’s interesting about the 2000 “hanging chad” election controversy is that Bush and Gore were fairly civil in their decorum to each other and voters didn’t burn downtown city centers to the ground. Life went on, as it should.
The 2020 election cycle runs the risk of where the final outcome for the Senate and the White House could be contested, fueling a disruptive path through the state court systems that could last considerably longer than the three weeks that paralyzed the Bush/Gore election before the highest court in the land brought an end to it.
This time around, the campaign rhetoric is highly charged and vitriolic. Not that there isn’t a rich history of cutthroat campaigns. There have been no less than eight contested Presidential elections in U.S. history, most notably Abe Lincoln’s win in 1860.
In last week’s column, I noted that a sharp market correction would provide a third great buying opportunity in 2020 for investors, but I am also of the view that investors buying and accumulating gold will be less inclined to sell even if/when the stock market rises again, as I suspect it will.
If the charts don’t lie, then bond yields are going higher. The one-year chart of the 30-year U.S. Treasury Bond shows a technical upside breakout in yield, currently at 1.64% as of last Friday. Owners of long-dated securities and leveraged bond funds could be residing in the house of pain in 2021, and one of the best offsets to rising rates and yields is the yellow metal.
The Fed’s policy directive to raise the core inflation rate to 2%, widespread price increases in most commodities (CRB Index Ex-Energy) and skyrocketing government debt loads in developed economies set the table for a resumption of the bull trend in gold prices.
One line of thinking that gets broad consensus is that markets hate uncertainty, and with the prospect of another major stimulus bill being passed at some point, such a huge amount of debt will very likely take the dollar down through support, thereby adding fuel to the rally in gold.
The Congressional Budget Office stated on September 2, 2020, that federal debt held by the public is projected to increase to 98 percent of gross domestic product (GDP) in 2020 (compared with 79 percent in 2019 and 35 percent in 2007, before the start of the last recession). It would exceed 100 percent in 2021 and rise to 107 percent in 2023, the highest in the nation’s history. (source: www.cbo.gov)
A chart of the Dollar Index (DXY) that trades against the euro, yen, pound sterling, Swiss franc and Swedish krona is on the verge of taking out the Sept. 1 low of 91.75. which opens the way lower to major support at the 88.0-90.0 level. From there, the next support level is down at 80.0 — where gold prices would be surging higher.
The bull case for gold is very solid. Hyper debt creation by Congress, ongoing Fed quantitative easing (QE), a resumption of global growth — especially in emerging markets, gradually higher inflation, rising bond yields and a depreciating dollar build the case for being long in gold as a portion of one’s portfolio.
Whether one buys gold in the form of bars, coins or tradeable securities is simply a matter of preference. They are all highly liquid. Gold closed last Friday at $1,905.20 per troy ounce, off its high of $2,208 registered on Aug. 8. It’s an attractive pullback that precedes what looks to be a string of scenarios that will make gold a shiny asset to own in 2021.
Following three months of consolidation, shares of GLD, hugging the 20-day moving average, look poised to trade to $200 in the next leg higher, implying a near-term return of 12%. Not bad for what looks like a high-probability trade. The longer term depends on managing rising debt loads versus economic prosperity. Sounds bullish for gold.