How the Election Impacts Gold

As you may have observed, there’s been relatively high volatility with the gold price in the 48 hours after the election of Donald J. Trump. We’re also seeing interesting price action with the miners.

Below we dive into why, in our opinion, this year’s election may not have the long term impact on gold that the media is projecting.

US Election Impact on Gold

We have been of the view that the outcome of the election would have little long-term impact on the exponential rise in Total Federal Debt outstanding and thus, the long-term trajectory of the gold price. As we’ve noted previously, gold and Total Federal Debt has a 93% correlation since 1971. Harris’ policies were bigger government and more entitlements. Whereas Trump’s agenda of lower taxes across the board to be replaced with tariff revenue is rife with uncertainty on tax revenue, inflation, and trade relations. The bond market sell-off following the Trump election victory speaks to the prospect for greater government borrowings and inflation fears.

We applaud the Trump agenda’s desire to shrink government’s share of GDP, but there are painful economic consequences in the short-term in doing so. Government spending accounts for 24% of GDP presently. Further, if the Federal Reserve was indeed bowing to political pressure to provide liquidity leading up to the election, the prospect of the Fed contracting liquidity poses additional economic risks to extended financial asset prices.

Gold assets appear to have traded up on the uncertainty leading up to the election over the past month. A lot of that movement has been reversed over the past trading day in gold and over the past couple of weeks in the gold mining shares. It is our opinion, gold and gold shares will resume their respective uptrends once the Trump election euphoria gives way to the reality of the challenging work at hand. The probability of the Fed needing to enact yield curve control measures to finance the deficit to prevent yields from exploding higher remains front and center, in our opinion.

Precious Metal Equities – Quick Thoughts

Q3 earnings season has kicked off for the precious metal mining companies over the past couple of weeks. Agnico, Pan American and Kinross Gold have reported strong earnings exhibiting leverage to higher gold prices and cost control. Newmont, on the hand, disappointed on higher cost guidance going forward as it works through absorbing its recent acquisition of Australian producer Newcrest Mining.

In our opinion, Newmont earnings announcement is an exception, but being the largest gold producer, its guidance blurred what looks like a strong earnings and cash flow season for the precious metals industry. Our expectation is for higher gold price fueled free cash flow to lead to precious metal producers to step up acquisition of companies with development projects and to increase dividends and share repurchases.

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