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INSIGHTS

US Election Series

The results of the 2020 US election in November are likely to have far-reaching consequences, with economic, policy and market implications in the US and around the world.

How Does the 2020 US Election Affect Commodities?

October 21, 2020

ERIC ROBERTSEN, GLOBAL HEAD RESEARCH, CHIEF STRATEGIST
PHILIPPE DAUBA-PANTANACCE, SENIOR ECONOMIST, GLOBAL GEOPOLITICAL STRATEGIST
PAUL HORSNELL, HEAD, COMMODITIES RESEARCH
SUKI COOPER, PRECIOUS METALS ANALYST

Since the first US presidential debate, our experts have been reflecting on the implications of the November election and modelling the potential outcomes of a Biden or Trump victory. We’ve seen little change to the pre-election polling forecasts, with Biden maintaining a 10 percentage point lead, early voting already underway, and high turnout anticipated. The conversation is now less simply about who could win the White House but increasingly about whether Democrats might pull off a ‘blue sweep’ of the Presidency and the Congress. With less than a month to go, our analysts consider what either presidency could mean for commodity prices, particularly oil and gold.

In This Moment

The fundamental drivers of the commodities market are not only monetary but also economic, particularly in emerging markets. The current level and pace of economic recovery has been surprising. Driven by emerging markets, export volumes have returned to about 100% of January 2020 levels in only two quarters. Compare this to the global financial crisis of 2008-2009 where the overall recovery was more protracted, taking place over seven-eight quarters. While a number of assets are trading at elevated levels (US treasuries, technology stocks, and credit spreads, for example), a recovery in commodities is less apparent. There is still $800 billion in capital sitting on the sidelines. Exports from advanced economies also remain below pre-pandemic levels. However, with monetary and fiscal stimulus working together ─ and likely to extend into 2021 ─ there is opportunity to make a strategic allocation shift.

The Outlook for Oil

Oil has been the least exciting commodity in terms of price performance over the past few months. After a weak second quarter, an expected demand recovery in the third quarter never materialized and prices have moved sideways for the past four months. We expect oil demand to regain less than two-thirds of its 2020 losses in 2021, leaving it at the same level as 2016. We do not expect the previous demand peak to be re-attained until 2023.

What a Biden Win Might Mean: A victory for Biden could still be positive for oil prices in the short-term despite an increased focus on the energy transition. However, other factors are likely to have a greater impact, including global demand, US shale oil output declines and relations between Russia and Saudi Arabia within the OPEC+  agreement. Biden appears more likely to explore a rapprochement with Iran, but a substantial increase in Iranian oil exports is unlikely to emerge in the short term.

What a Trump Win Might Mean: Trump’s intervention in the Russia-Saudi Arabian oil price war was significant and marked the first acceptance by him that abnormally low prices are not necessarily positive for the US, a view that would be likely to persist into a second term. His approach to the US domestic oil industry would be likely to remain relatively hands-off; that industry faces significant output declines in 2021 regardless of election results due to a collapse in financial viability and drilling and completion activity.

Will Gold Keep Its Luster?

The COVID-19 crisis has witnessed gold rise to record high levels as well as experience the biggest daily correction since 2013, which took place in August. The fundamentals, however, remain supportive of gold, and the universe of investors in gold has expanded. At the moment, gold is taking its cue from external markets and behaving much like a currency. In previous elections, gold buying has been higher following a Democrat win and lower following a Republican win. We have not seen pre-election buying behavior so far, but this is likely to come. Gold has a strong negative correlation with the USD, and this correlation has strengthened. With real interest rates low, at zero or negative globally, the opportunity cost of holding gold is very low.

What a Biden Win Might Mean: In the event of a clear Biden victory, the USD is predicted to weaken which, given the negative correlation, could push gold prices up.

What a Trump Win Might Mean: With a clear Trump victory, the USD is predicted to strengthen which, given the negative correlation, could push gold prices down initially. This is also likely in the event of an unclear or contested result, but thereafter prices should rise.