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Gold Wave Likely Regardless of U.S. Election Outcome
by Paul Wong, Sprott Money:
October was a flat month for gold bullion, with the yellow metal losing 0.37%. Year-to-date through October 31, 2020, gold has gained 23.83.1 Silver bullion2 climbed 1.81% in October and has risen 32.51% YTD. Gold mining equities pulled back in October but have gained 27.57% YTD and 32.83% YOY as of October 31 (as measured by SGDM3). This compares to 2.77% YTD and 9.71% YOY returns for the S&P 500 TR Index.6
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Month of October 2020
| Indicator | 10/31/2020 | 9/30/2020 | Change | Mo % Chg | YTD % Chg | Analysis |
| Gold Bullion1 | $1,878.81 | $1,885.82 | ($7.01) | (0.37)% | 23.83% | Narrow trade range in October |
| Silver Bullion2 | $23.66 | $23.24 | $0.42 | 1.81% | 32.51% | Narrow trade range in October |
| Gold Equities (SGDM)3 | $32.00 | $33.47 | ($1.47) | (4.39)% | 27.57% | Gold equities back to support |
| Gold Equities (GDX)4 | $37.49 | $39.16 | ($1.67) | (4.26)% | 28.04% | Same as above |
| DXY US Dollar Index5 | 94.04 | 93.89 | 0.15 | 0.16% | (2.44)% | Range bound at lower range |
| S&P 500 Index (Price Return)6 | 3,269.96 | 3,363.00 | (93.04) | (2.77)% | 1.21% | Wide choppy trade range |
| U.S. Treasury Index | $2,556.44 | $2,580.77 | (24.33) | (0.94)% | 7.88% | Did not offset equity decline |
| U.S. Treasury 10 YR Yield | 0.87% | 0.68% | 0.19% | 27.73% | (54.44)% | Bear steepener, reflation expectation |
| U.S. Treasury 10 YR Real Yield | (0.84)% | (0.95)% | 0.12% | (12.12)% | (745.22)% | Less negative but still near lower range |
| Silver ETFs (Total Known Holdings ETSITOTL Index Bloomberg) | 885.52 | 869.99 | 15.53 | 1.79% | 45.92% | Dip buying, <1.3% from all-time highs |
| Gold ETFs (Total Known Holdings ETFGTOTL Index Bloomberg) | 110.84 | 110.65 | 0.19 | 0.17% | 33.68% | Monthly high, <0.4% from all-time high |
Figure 1. Gold Bullion Continues to Outperform Major Asset Classes YTD
Source: Bloomberg. Period from 12/31/2019-10/31/2020. Gold is measured by GOLDS Comdty; US Agg Bond Index is measured by the Bloomberg Barclays US Agg Total Return Value Unhedged USD (LBUSTRUU Index); S&P 500 TR is measured by the SPX; and the U.S. Dollar is measured by DXY Curncy. You cannot invest directly in an index. Past performance is no guarantee of future results.
Awaiting the Pivotal U.S. Election Outcome
October was a predominantly quiet month for all asset classes, until the last week, from a liquidity and trading perspective. As expected, post the September OpEx (options expiration), all markets saw reduced activity ahead of today’s U.S. election. The uncertainty over the U.S. election has been priced in the volatility market where volume pricing shows an elevated level in November through to January.
Since the summer, anxiety levels have ebbed and flowed with three rotating themes: 1) Increased market chaos given heightened election uncertainty; 2) A possible Democratic (Blue Wave) sweep resulting in massive fiscal stimulus and a more significant reflation outcome despite higher taxes; and 3) A Republican retained Senate leading to much lower fiscal stimulus and an uncertain reflation outlook. While the market has been trying to price in a possible election outcome, the COVID-19 pandemic entered its second wave in both the U.S. and Europe and ushered in the risk of further restrictions that will damage economies.
Investors stepped away from markets in October due to the twin uncertainties of the election outcome and the COVID’s surging second wave. The most notable market impact was the sharp reduction in trading liquidity and market depth as fund positioning collapsed into a holding pattern. Dealers backed away from liquidity provision and facilitation due to the problematic nature of hedging idiosyncratic election risk. Finally, in the last week of October, we witnessed a sharp market selloff due to the growing restrictions and containment in Europe as COVID cases crept higher, decreased odds of a Red Wave in the U.S. election and failure to pass a COVID relief package before the election. Economic growth expectations took a hit, and indiscriminate risk aversion in an illiquid market resulted in chaotic price action but minimal market signal.
Gold Bullion: The Tale of Two Markets Continues
In October, spot gold fell $7 per ounce (-0.37%) to close at $1,879 in a narrow trading band. For gold bullion, we continue to see a tale of two markets. In our September monthly (Gold’s Breather Creates Buying Opportunity), we highlighted the two groups representing the dominant holders of gold bullion. ETF investors represent the largest group, which we described as more long-term macro-fundamental driven. The other group consists of futures traders who are focused on positioning and are liquidity-driven. The trend we highlighted last month remains in place: ETF buying continues among investors while futures traders are reducing positions. Everything macroeconomic (i.e., M2 money supply, the U.S. dollar, real interest rates, etc.) continues to be gold bullish long-term and short-term, or sideways at worst. Everything market depth and liquidity-related weakened as we headed closer to the U.S. election. Figure 2 highlights the intact bullish trend and the most recent correction compared to the prior short-term pullbacks.
Figure 2. Gold Bullion is in a Familiar Corrective Pattern
Source: Bloomberg. Data as of 11/01/2020. Gold bullion price is measured by the Bloomberg GOLDS Comdty Index. You cannot invest directly in an index. Past performance is no guarantee of future results.
Despite the intense focus on the possible outcomes of today’s U.S. election and the COVID pandemic’s burgeoning second wave, we are in a “risk mitigation” (or derisking) type market, not an “event risk” market (significant cross-asset class repricing). Market systemic risk measures such as interest rate swaps (IRS), overnight index swaps (OIS) and U.S. dollar swaps (USD swaps) remain well under any “event risk” measure (unlike February to March of this year). In general terms, gold tends to have mixed results for risk mitigation purposes, which usually translates to portfolio exposure reduction. Event risk would see a major repricing of asset classes and wide-scale changes in volatility exposures and expectations. The market may reach an event risk if the U.S. election results in chaos, but that is not the situation at this writing.
