US ELECTION DYNAMICS A POSITIVE FOR GOLD, WITH MIXED IMPACT ON KEY COMMODITIES

By Bart Melek, Managing Director & Global Head of Commodity Strategy, TD Securities

The results of the upcoming US presidential election are set to be very consequential to energy and climate, international relations, industrial and fiscal policies. Even if President Joe Biden remains in power and the Senate and House are controlled by the same parties as they are now, political debate in the coming months, along with policy drift in response to opinion polls, are sure to occur. This already is shaping, and will no doubt continue to shape, the market outlook for gold, silver, PGMs, copper and crude oil.
A regime change in the White House and Senate has the potential to reduce spending for environmental initiatives financed by the allocations under the Inflation Reduction Act (IRA). This would be a modest negative for copper and silver, but a positive for Platinum Group Metals. Crude oil and fossil fuels should also benefit. Of course, the degree to which these markets are impacted will depend on the exact policy adjustments pertaining to key sectors such as transportation, power transmission and generation, after the election. That, in turn, will be a function of the final political realities in Congress and the White House.
A Republican administration is likely to push lower taxes, with spending largely unchanged. The resulting higher deficit projections, from the already very high numbers, should help gold, as it suggests higher inflation, lower real rates and continued central bank buying. A likely even more adversarial stance toward China and Iran by a Republican administration would also contribute to gold’s good fortune and should see oil well supported.

The 2024 presidential election is expected to be very impactful on the lives of Americans, America’s allies, and adversaries throughout the world. The next president will set policies on numerous fronts of public life, ranging from social, fiscal, trade, environmental and military/geopolitical policies. In particular, environmental, fiscal and foreign policy pre-election and post-election dynamics are the most consequential on gold, silver, PGMs, copper and crude oil.

The Inflation Reduction Act, which was enacted in 2022 and contains several measures that aim to promote decarbonisation of the US economy, may change should the occupant of the White House change and the balance of power tilt toward the Republican party in Congress.

LESS ROBUST ENVIRONMENTAL POLICY A MODEST NEGATIVE FOR SILVER AND COPPER, BUT GOOD FOR PGMS

The Inflation Reduction Act has the potential to massively expand America’s expenditures on climate initiatives. It includes investments in deploying clean energy, expanding the electricity grid, developing domestic clean technology manufacturing, creating incentives to uptake electric vehicles, reducing methane emissions, increasing the efficiency of buildings, and improving the climate resilience of communities. In aggregate, around US$370 billion will be allocated for measures dedicated to improving energy security and accelerating clean energy transitions.

If there are reductions to these commitments, copper and silver are likely to be impacted negatively. A reduction in electric vehicle (EV) subsidies would mean less demand for battery-powered vehicles, and thus less copper and silver demand growth. A standard ICE vehicle uses some 22 kg of copper compared to 53 kg used by an EV. The same traditional vehicle uses only a fraction of the upwards of 2 oz of silver used by a full electric vehicle. Less investment in electricity transmission, charging, and power generation infrastructure would also negatively impact copper.

Currently US CAFE standard is planned to be 49 mpg by 2026 but is slated to rise all the way to 58 mpg by 2032. As such, the Environmental Protection Agency (EPA) estimates that the new emissions rule for light-duty and medium-duty vehicles would require up to two-thirds of new cars and trucks sold in the US to be EVs in eight years.

Both a reduction to mandated US CAFE fuel standards and less subsidies for EVs would negatively impact silver and copper but would help PGMs. As we are already seeing, due to the lack of charging infrastructure, high costs, and distance anxiety, the US public has partially turned away from pure EVs. Albeit less aggressively than under the Biden administration, it is likely that there would still be a more organic push to higher fuel efficiency under a new administration. This suggests that hybrid vehicles, which use petroleum products, batteries, and electric motors, would fill that gap.

So, the negative impact on copper and silver may be quite limited from US policy changes, but the relative boost to platinum and palladium could be substantial. Hybrids use as much PGMs as do ICE vehicles. From a global perspective, China and Europe will keep the current trend mostly intact, which given the projected deficits in copper and silver means very firm prices indeed.

Less Ambitious Green Spending to Moderate Copper Demand in US

Copper Loadings Per Vehicle
ICE Vehicle	25kg
Hybrid	50kg
BEV	75kg
Copper Loadings Per Electricity Source
Conventional Grid	1,500 kg/MW
Nuclear	2,000 kg/MW
Onshore Wind	3,500 kg/MW
Offshore Wind	9,550-12,000 kg/MW

Source: Precious Metals Commodity Management LLC, IEA, TD Securities

Silver to Benefit from Spending on Next-Gen Solar Technology

SKY-HIGH DEFICITS AND MORE ADVERSARIAL US-CHINA RELATIONS A MANNA FOR GOLD

The US debt in March 2024 was around $34.59 trillion, roughly 100 percent of GDP and, according to the CBO, will steadily increase over the next 30 years. The fear is that it will be partially monetised, as there is little appetite for higher taxes.

The total US deficit is projected to grow from an expected $1.6 trillion (5.6 percent of GDP) in fiscal year 2024 to $1.8 trillion in 2025. The US deficit would likely grow to an even more enormous size if Mr. Trump were to become President again. In sharp contrast to Mr. Biden, the GOP may try to reduce taxes. Meanwhile, there is no substantive plan to reduce spending.

Persistent massive deficit spending under the Biden administration and a Fed that was very slow to hike rates in response to the recent inflation spike have already helped to drive central banks and many investors into gold, as purchasing power protection or a hedge against long-term US dollar depreciation.

A rise in geopolitical tensions globally, as well as continued stresses between the US and China in the South China Sea and over Taiwan have also served to encourage buying, as some central banks diversified away from USD and other fiat currencies.

This may have well been a reaction to sanctions against Russia, which prevented Moscow from accessing around half of their FX reserve holdings. Meanwhile we believe the Putin administration has been using physical gold to facilitate transactions with Russia-friendly countries. This was possible because physical gold can be moved, and it is nobody’s liability with intrinsic value.

Indeed, 2022 saw central banks buy a record 1,136 tonnes, and a near record amount in 2023. This buying spree coincides with a trend among central banks globally to diversify their holdings to reduce their reliance on the US dollar. The last two years recorded the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971.

The People’s Bank of China (PBoC) has been on the forefront of this activity, as it snapped up the yellow metal for 17 straight months, with its holdings of the precious metal rising 16 percent over this period. In 2023, China’s central bank bought 225 tonnes of gold. In March, China’s gold reserve rose by 5 tonnes, taking the country’s total holding to 2,262 tonnes or 4.4 percent of its FX reserves.

Very Strong Central Bank Buying Activity to Continue Regardless — But More Under GOP

Plenty of Room For China to Grow Reserves

GOLD A GOOD SANCTION-PROOF PRIVATE AND CENTRAL BANK PORTFOLIO DIVERSIFIER

US-China tensions are set to remain elevated during the US presidential election as rhetoric surrounding very large deficits, the South China Sea, and trade policies all come to the forefront. As such, the PBoC and other central banks should continue to show interest in gold. While a GOP victory implies higher deficits and more China tensions on all fronts, a Democrat victory would still preserve the US adversarial relationship with China and see astronomically high deficits.

Diversifying FX reserves due to US dollar purchasing power concerns and rising geopolitical tensions should continue to be strong demand drivers in 2024 and beyond. The yellow metal protects against purchasing power erosion and is a good inflation hedge due to the fact it is a real asset, which requires inflation-sensitive real inputs such as labour, capital goods and energy to produce. At the same time, since it is a highly liquid, scarce asset with intrinsic value, and it is no one’s liability, it is a great way to diversify an investment portfolio and central bank FX reserves, making it sanction proof.

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BART MELEK has over 20 years’ experience analysing precious metals, base metals, energy, financial markets, as well as key economies. He has worked closely with commodity, equity and FX trading desks around the world, and has several forecasting distinctions and top global rankings. Bart contributes to the TD Securities strategic view on commodity, various other markets and macroeconomics. Bart is also a sought-after media commentator. Before joining TD, he held senior roles in equities, commodities and risk.