The Case for Gold: Election 2020

One week from today, we should know which direction the country has chosen for the next four years. Until then, our clients have been clamoring for physical gold like never before. Whether they are looking into rolling over an IRA, transferring a 401(k), moving out of cryptocurrency, or just adding to an existing diversified position with even more gold, silver, or platinum, the message is clear:

No matter the outcome of the 2020 presidential election, the next four years will be filled with significant changes, challenges, and concerns.

If you are a regular reader of this newsletter, you know that I stay far afield from fear-mongering headlines, scare tactics, and partisan politics. That said, the gold market can be largely affected by factors related to political uncertainty and economic instability. As a company, we regularly follow the latest news, established economists, reputable financial analysts, and various industry reports to be informed at every level possible.

But the hundreds of clients we speak to each and every day help us keep our finger on the pulse of consumers and their concerns about their financial future.

As always, many important issues drive a person to select a particular candidate. With that in mind, I want to focus on what we have been hearing from many of you: your thoughts on the election’s possible outcome, specifically as it relates to future economic policy and how that could impact the portfolios and retirement plans you have all worked so hard to build.

There is a sharp difference in viewpoint and policy between the two candidates. As the public awaits the results of Election Day, millions of Americans have begun to prepare their portfolios for either outcome. We at U.S. Money Reserve, along with many analysts, and—based on the call volume of our clients—even more of you believe that in either scenario, now is the time for “wealth protection.”

Why gold can win if Joe Biden wins the presidential election

According to many analysts, if Joe Biden wins the office of the presidency, there could be a major economic disruption. They reason that his economic and environmental policies could result in a significant loss of income for Americans across the nation.

• A study by the Hoover Institution, as reported by Fox Business, found that Biden’s policies could lead to a loss of roughly $6,500 per household annually. His policies on fracking, for example, have some in the oil and gas sector worried that fracking jobs could disappear.
• In a column for The Boston Globe, economics commentator Stephen Moore wrote that a Biden presidency could result in the most significant tax increase in history, higher “death taxes,” massive state bailouts, and an increase in minimum wage even in states with lower costs of living, making it harder for small businesses in those states to survive.
• Capital-gains tax is one area that our clients are very concerned about. A Biden win could move the capital-gains rate up to 39.6% for people with an income of greater than $1 million. That’s up from 23.8%, which is the 20% rate plus the 3.8% net investment income tax (NIIT). Biden also has proposed eliminating the so-called step-up in basis. This tax rule states that if an heir sells an inherited asset (like 7,000 shares of Apple), then capital-gains taxation on any future sale is pegged to the asset’s value at the time of inheritance, not the date of the original purchase. If an asset appreciates greatly over time, the step-up in basis saves an heir plenty in capital gains. (MarketWatch’s Andrew Keshner—10/24/2020)
• A Biden presidency could mean more economic stimulus than a Trump second term but could also result in higher taxes on businesses, higher-income people, and capital gains. (FIDELITY VIEWPOINTS—10/22/2020)
• While President Trump has focused on deregulation, a Biden administration could likely re-regulate certain industries. Among the possible targets include fossil fuels, financial services, healthcare, and big tech. (FIDELITY VIEWPOINTS—10/22/2020)
• Stock buybacks have been a significant source of returns for portfolio holders over the past decade. Democrats could move to limit these, while Republicans would likely support the status quo. (FIDELITY VIEWPOINTS—10/22/2020)
• Biden has proposed increasing the top tax rate for corporations to 28%, up from 21%, and for individuals to 39.6%, up from 37%, while treating capital gains and dividends, now taxed at a top rate of 20%, as ordinary income. (FIDELITY VIEWPOINTS—10/22/2020)

Why gold can win if Donald Trump wins the presidential election

If President Trump wins a second term, some of his policies could also benefit gold. In the past, President Trump has criticized the Federal Reserve for not cutting interest rates enough, even wanting rates to move into negative territory to compete with other nations with negative interest rates.

On September 11, 2019, President Trump tweeted, “The Federal Reserve should get our interest rates down to ZERO, or less.” He reiterated these arguments on May 12, 2020, when he tweeted, “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT.” Big numbers!” A policy of prolonged low interest rates can be harmful for the power of the dollar versus other currencies and thus help bolster the importance of owning physical gold.

Trump has also shown favorability toward returning to the gold standard. One of Trump’s nominees to the Federal Reserve Board, economist Judy Shelton, who was approved earlier this year, has publicly expressed interest in returning the United States to the gold standard.

It is also worth noting that the price of gold steadily rose during Trump’s first term. This rise even preceded the recent economic crisis. For example, gold’s price was $1,210 per ounce near the beginning of Trump’s term and was in the $1,500-per-ounce range before the coronavirus outbreak.

• An orderly Trump win on November 3 would be “the most favorable outcome” for markets, JP Morgan analysts wrote in a note to portfolio holders on Monday. Equity markets could see a 12.6% boost under a Trump reelection victory, while a Democratic sweep would be “mostly neutral.” (Leandra Bernstein Sinclair Group Monday—10/26/2020)
• Bigger paychecks, extra savings: Should the Trump administration eventually implement ideas like the payroll tax cut and possible income tax reductions for middle-income taxpayers, many individuals could end up holding larger paychecks. If that is the case, it would make sense to potentially earmark the surplus for savings, diversified portfolio assets, and longer-term financial goals. If nothing else, making sure these additional funds get set aside rather than spent could help stave off any future monetary issues. (Ben Rizzuto CRPS^®, Retirement Director Trader’s Insight—10/23/2020 )
• President Trump has proposed reducing the capital-gains tax from the current 20% rate to 15% as well as indexing it to inflation. (It is not clear whether this would be inclusive of the 3.8% NIIT.) (Ben Rizzuto CRPS^®, Retirement Director Trader’s Insight—10/23/2020)
• Chief market strategist Ryan Detrick at LPL Financial said a Trump victory could be most beneficial because stocks “like it more when a president wins reelection.” Detrick based his assessment on historical data showing the S&P 500 performing better one year after an incumbent wins reelection than under a new administration. (Leandra Bernstein Sinclair Group Monday—10/26/2020)

Some factors that benefit gold are true for either candidate.

Regardless of who hold the keys to the Oval Office, there are some realities we must face.

• The nation’s economic debt has increased faster than any time in history.
• Consumer spending has slowed at a rate that many worry will cripple businesses even further.
• The travel industry, commercial real estate, service industries, and traditional retail are hanging by a thread, and the recent dramatic uptick in COVID-19 cases will likely cause further issues in these industries.
• The Federal Reserve may be closer than ever to allowing cryptocurrency to be considered “insurable” currency.
• Many businesses and industries are still on shaky ground. Given either winner of the election, gold and other precious metals could likely continue to provide significant benefits for portfolios.

There has never been a clear trend on what happens to gold prices directly after an election. That being said, Citigroup recently suggested gold could hit a new record high. “Uncertainty over the contest and delays about the outcome may ‘be under-appreciated by precious metals markets,’” analysts, including Aakash Doshi, said in a quarterly commodities outlook. The bank’s forecast implies a surge of more than $200 per ounce for bullion by the year’s end.

Regardless of who wins the White House, one thing is clear for all Americans: The future is filled with considerable unknowns. Given the ongoing economic and political uncertainty, it’s critical to protect your wealth and act now to safeguard your future in the event of any outcome. Many of our clients are turning to a method of wealth protection that has been trusted for decades: gold. Are you?

 

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