The weekly US election countdown: 11 weeks to go

Chart of the week: Is the move in the gold price to all-time highs US election related?

Chart: The most traded gold bullion ETF, the SPDR Gold Shares (GLD – in dark blue) tracked the gold price to new all-time highs this week as it rose above USD 2,500 per troy ounce for the first time ever. The gold price this year is up over 21% vs. 17.6% for the US S&P 500 index. Note that a popular ETF of gold miners, the VanEck Gold Miners UCITS ETF (GDX – in gray) has risen as well, but is nowhere near all-time highs. This could be due to challenges in yields at gold mines, forward selling of output by miners and rising costs of extraction.
Is gold’s rise of late somehow US election related? After all, neither of the two US parties makes any real effort to suggest they plan on doing anything about the terrifying trajectory of the ballooning US national debt. Harris’ policy proposals unveiled late last week would pile on further debt if no off-setting tax revenues are found to pay for them. Trump’s huge tax cuts and Biden’s huge fiscal spending programs have brought the US national debt to 122% of GDP. There are certainly other factors at play, but the rising gold price is almost certainly in part due to the US’ increasingly shaky public finances as global investors question the credit-worthiness of the issuer of US dollars, the global reserve currency. And US finances can only worsen further regardless of the White House occupant in the next recession, when spending to soften the impact of the economic weakness inevitably rises as tax revenues fall. If the US government can’t afford to service its debt, inflation and negative “real rates” (the difference between the interest rates and the rate of inflation) are the only way for the government to deleverage. This dynamic favors hard assets like gold in the long term.

Two key points on the US Election this week:

1. Polls and prediction markets are poor indicators for US election outcome odds.

It’s always critical to point out that US political polling has mislead many observers on the likely outcomes for recent elections. In 2016, the nation-wide poll averages were basically spot-on and even slightly over-estimated Trump’s popularity. But what gave Trump the election was stronger than expected results and narrow wins in US states that were considered safely Democratic – particularly Pennsylvania, Michigan and Wisconsin. What caused those states to suddenly tilt for Trump? The very short answer is voter turnout, as new voters that had never voted before suddenly showed up at the polls.

We’ll talk about this plenty more in weeks to come, but as long as the polls are anywhere near close, the election is Trump’s to lose unless there are key voters that are highly motivated for Harris relative to Trump.

2. The recent market volatility had very little to do with US election dynamics

It is impossible to point to market developments that are fully and only linked to US election outcomes at this stage. But there was a flurry of market activity around the time of the assassination attempt on Trump that was arguably linked to the strengthening odds of his winning in the wake of that event. This included a sudden surge in crypto-currencies, which Trump has spoken strongly in favor of, and a surge in small-cap stocks and financial stocks like large banks. Financials rallied as the market knows that Trump favors general deregulation. And the market probably also recalled the surge in small-cap stocks when he was elected president in 2016 due to his promising the huge corporate tax cuts that he delivered in 2017.

But as we argue in the Saxo Market Call podcast discussing this summer’s market volatility and election scenarios, the vast majority of the volatility over recent weeks has been linked to non-election issues.

Looking ahead: What we’ll be watching

Scripted Harris versus off-the-cuff Trump: key week for both candidates.

This week is a critical week for the Harris campaign, as the Democratic National Convention kicked off yesterday and will feature VP Walz speaking on Wednesday and Harris’ nomination acceptance speech on Thursday. She does very well with a teleprompter and has injected tremendous energy into the Democratic campaign. But a known weak point for Harris, is “the unscripted moment”, as she has struggled with gaffes and communicating effectively in press conferences with unscripted questions and one-on-one interviews, even with a friendly reporter. But at some point, that close-up moment will have to come – likely before the end of August.

Trump, meanwhile, seems to be eyeing this weakness and has even touted it loudly. For his part, he is launching a big push this week to attend rallies in several swing states and will sit for multiple press conferences and interviews.

In short: this will be the first week in which both campaigns are going at full tilt at the same time. Stay tuned!

Will Trump do something dramatic to shake up his race?

On the Trump side, many have speculated that Trump’s slide in the polls could mean he is looking for some dramatic reboot of his campaign. Back in 2016, it was around this time of the election season that he fired key campaign figures and went “full MAGA” with the Kellyanne Conway and Steve Bannon advisory team. Could he be eyeing a similar move this time around? Could even his unpopular VP pick Vance be in the firing line so late in the race? With Trump, you never know.

Election-related market drivers from here.

The market has come rip-roaring back from the recent turmoil, in part because of benign US data that has shown both slightly lower than expected inflation and better labor market data, driving hopes for a “soft landing” or even no-landing. In the near term, the market will likely not put the election more on the agenda in the near term unless something shifts dramatically in the polls. What could spark such a change?  That list could include an up-close, unscripted interview of Harris, a dramatic reset by the Trump campaign, but especially that September 10 debate.

See you next week!

*Footnote: fivethirtyeight.com is one of the better know poll aggregators and analyzers. It was far more accurate than the mainstream media in predicting 30% odds of a Trump victory (not a bad call, given that a swing of about 55,000 votes among the more than 10 million voters in Pennsylvania and Michigan would have given the election to Clinton). But even after a subsequent soul-searching on why polls in the US, especially those in the mid-West states that surprised many in swinging for Trump, fivethirtyeight.com’s aggregated polls suggested a landslide 8% margin of victory for Biden, which only proved to be 4.5%.

**Footnote: PredictIt is an on-line real trading market that allows participants to trade shares based on political event outcomes, and thus represents traders with real “skin in the game” on outcomes. The combination of Harris/Trump odds may add up to over 100 at times, unlike standard polls.

Footnote: Who is John J. Hardy? John is Saxo’s Chief Macro Strategist, with over twenty years experience in the financial markets, chiefly as Saxo’s former Head of FX Strategy. He is also an American, having grown up in Houston, TX and has a long-standing passion for following the course of US elections and their place in history.