What does the Biden presidency mean for the economy and gold demand?

US Presidential Election Result

 

 Joe Biden is widely accepted as having won the election and will become the 46th president of the United States on 21 January 2021. The nature of US political divisiveness means the handover of power will not be smooth, and it comes in the midst of a global pandemic that shows every sign of accelerating. 

Biden’s policies will affect business decisions, tax, regulation, the dollar and fiscal stimulus policy, all of which will affect gold prices. So how is a Biden presidency likely to affect gold demand and the rest of the market?

Tax and regulation

Although not all campaign promises are kept once in office, Biden’s tax policies lean, as most democrats do. They trend towards increasing taxes on the wealthy and corporations in order to provide tax relief to lower wage earners. Joe Biden has already proposed increasing corporation tax to 28%, up from the 21% that it was cut to during Donald Trump’s tax overhaul. 

Biden also wants to impose a 15% tax on the book income of companies that make more than $100 million but don’t actually owe US income tax. Individual tax burdens would increase for people earning over $400,000 and the inheritance tax exemption threshold would be lowered.   

It’s possible that these US tax policies will have to be diluted because republicans look likely to retain control of the senate which will make enacting them more difficult, but even a watered down version of these proposals will be viewed as detrimental to the markets and could dampen investment growth over the course of Biden’s term. In addition, the president-elect is leaning heavily towards more strictures on financial regulation which would affect Wall Street sentiment and could similarly curb market growth.

Is Biden good for business?

A Biden administration will try and amend the regulatory regime to improve workers’ rights and potentially increase wages. An increased ability to unionise, and a rise in the minimum wage, if enacted, would increase businesses’ costs. Meanwhile, the democratic policies on climate change are in direct contrast to Donald Trump’s withdrawal from the Paris Climate Agreement, and companies will likely face greater disclosure requirements and emissions limits.

Ultimately, tighter restrictions on corporate behaviour, higher taxes and increased reporting requirements will have an effect on businesses and a knock-on effect on markets.

Financial stimulus

Joe Biden ascends the presidency at a very difficult period in economic history. The global pandemic has forced governments around the world to pump money into a floundering economies and further stimulus is required. The US has already enacted a $2.2 trillion Cares Act in March, the largest in US history, but they are currently debating a new stimulus package. 

The Heroes Act will also top $2.2 trillion but is not yet approved. It may only get passed once Biden is in situ, although it is possible some of the measures may be agreed before then. Whenever it is approved, the second stimulus package will add another substantial debt burden to an already weighed-down US administration.  The fiscal tightening required to balance the books will affect the US economy throughout Biden’s term.

Presidential change management        

Donald Trump is already refusing to concede, it would seem, and pressing ahead with ineffective lawsuits, but Joe Biden will have many more impediments to his preferred policy changes if the democrats don’t win more Senate seats and wrest the majority from the republicans. With laws requiring both houses’ approval, Biden may find any major reform thwarted at worst or diluted at best. The uncertainty of a split legislature will add to the unpredictable economic environment which can weigh on market sentiment.

What does a Biden presidency mean?

Before the outcome of the election was known, markets had already singled out a Biden win as potentially detrimental to market sentiment. The democratic ethos leans towards higher taxes and greater regulation, which can impact stock markets and prompt a spike in the gold price according to JP Morgan analysts

In addition, the dollar could fall as Biden discards Trump’s heavy-handed trade tariffs, encouraging imports, and exports, which would add to the global supply of dollars. More importantly for the dollar though, is the inflationary effect of the massive fiscal stimulus packages, and the potential for interest rates to remain at very low levels for some time to come. When the dollar falls, the gold price usually rises.

Will the White House back gold?

Investors considering the newest resident of the White House should be aware of his economic policy and how it could affect their investments. Holding gold in times of uncertainty is an effective hedge against declines in other assets, especially stocks, as the relationship is often inverse.

Biden has inherited a tough economic legacy. Whatever his economic and financial reforms, the COVID-19 debt burden will weigh on any recovery. Investors with US-focused assets would do well to diversify at least some of their portfolio into a safe-haven asset like gold, for if the dollar looks likely to decline, the outlook for gold will strengthen.

 

 

US Presidential Election Result
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