Gold and Silver to shine after the US elections – TDS

Strategists at TD Securities expect that gold and silver will all do better after the election, with the specific fiscal, tax and social policy initiatives and current market positioning determining the upside magnitude. In addition, they expect silver to outperform the yellow metal due to investments in green technology.

Key quotes

“Despite any vote-related erratic behavior, the post US election period should very likely see a reduction in market volatility and policy uncertainty. With that, it is likely that large fiscal spending programs, topping five trillion dollars over the next two years, will very likely be passed by whoever is in power. At the same time, we believe that taxes over that period should not rise much either, as this would be counterproductive during a pandemic.”

“With the Fed continuing to peruse its current QE program, many in the precious metals market will worry about the debasement of the USD and indeed fiat currencies. The Fed's signals that it will keep rates across the curve from rising, even as inflation moves north of two percent, suggests that real rates, which are a key driver of gold, will continue to fall and help lift the price to our $2,100/oz target next year. The very flat curve should also help prevent the flow of physical metal to the market, serving as support.”

“With more money circulating, interest rates (effectively the price of money) falls. Governments increase spending with the money central banks create and then spend more again by borrowing since interest rates for the government are often near zero, and sometimes below. With that, fixed income instruments will not deliver much value, particularly if central banks impose negative rates. In this environment, gold shines as its supply is very slow to expand relative to fiat money. Mine production will have a difficult time to grow much faster than two percent per year for the foreseeable future.”

“We judge a Democratic party dominated administration is more likely to be hooked on excessive spending and monetary policy stimulus, which is more gold friendly. A Blue Wave could well change the Federal Reserve Act in order to facilitate monetization as a permanent policy to fund excessive government debt.”

“Silver does well when there is a favorable environment for gold. It has a historical volatility double that of gold. And, at the current 78 gold-to-silver ratio, the white metal is very cheap. We expect investors to buy it for the same reason as they do gold, but also to capitalize on the post-COVID industrial recovery as over 60 of silver demand comes from industrial sources. Expenditures on green energy infrastructure, decarbonization, and electrification should help silver as it is very much used in solar panels and virtually all electrical circuits. Plus, given supply is constrained, there will be pressure on the existing supply which should see it move to $30/oz again next year.”