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What are commodities' poll positions?
Investors urged to diversify as US election outcome to greatly affect market.
Analysts are predicting that financial markets will experience volatility leading up to the US elections, while the dollar and crude could lose and gold may gain if President Donald Trump fails to win.
Hence, they favour diversifying portfolios to avoid having an over-reliance on one asset and recommend 10 to 15 per cent cash of one's total portfolio in order tap any opportunity that might emerge during this phase of volatility.
Trump will contest for a second term while Joe Biden has been nominated by the Democratic Party for the presidential elections on November 3.
Syam K.P., chief analyst at Gulf Brokers, expects that the coming weeks will be volatile for financial markets due to high levels of uncertainty. The single best way of protecting investors from the downside that an election offers is to ensure they have a truly-diversified portfolio.
Miguel A. Rodriguez, market analyst at Capex.com, said the months preceding the US polls have long been deemed a period of uncertainty, specifically for capital markets that are prone to reacting defensively.
He said the US dollar tends to weaken in these occasions, although it is true that the current and most likely future trend of the American currency is clearly downward, mainly due to the historic fall in treasury yields.
"This trend could be further accentuated in the event of a Democratic party win, taking into account the uncertainty created by the shift in government regime, as well as a probable increase in public spending and a consequent surge in public debt. The US dollar could lose up to five per cent of its value, taking its current price as a reference, if Trump is defeated in the elections by Joe Biden. The dollar index could fall to levels of 88.00-88.50, levels of which have not been seen since June of 2010," he said.
Chaddy Kirbaj, vice-director of Swissquote Dubai, doesn't expect any change in US monetary policy. Hence, the dollar may start gaining trust if Biden wins and US yields start attracting investors again.
Roberto D'Ambrosio, CEO of Axiory Global, says the US currency might continue to remain weak with the euro being the first choice.
He said such a scenario might dramatically change in case of a rise of geopolitical tensions, in which case the asset surges in value.
D'Ambrosio said Trump's re-election might hint to a prolonged period of near-zero interest rates, as confirmed by the US Federal Reserve lately; this hints to very low returns of quality bonds, thus favouring gold in respect of this asset class.
On the other hand, he said the injection of liquidity in the financial system by the central bank is likely to continue no matter what the outcome the election will be, continuing to fuel the stock market and reducing the safe-haven aspect of gold, thus putting pressure for a correction of its price and favouring the dollar and oil.
"As for gold, in my opinion, the main factor to consider is whether the investor see the actual evaluation of the stock market being sustainable. The S&P 500 PE/ratio, the recent highs despite the impact of the Covid-19 pandemic, its unpredictability, the lack of a clear path to the vaccine, should call for a correction," he added.
Rodriguez sees gold could gain in the event of Trump losing the election.
"The recently-realised $2,075 per ounce all-time high could be exceeded and although there are no price benchmarks in this area, a 10-20 per cent rise from those levels can be considered possible in the event of a Democratic victory. As such, gold would be the most advisable investment to hedge against the true possibility of Trump's presidential loss," added Rodriguez.
Kirbaj said gold's momentum has started to weaken, although he doesn't expect a big drop and trading may remain choppy.
Rodriguez said crude is the asset that would be affected to a lesser extent by the US elections, at least in the short term.
"A Democratic victory would ease trade tensions with China, in addition to mobilising greater support for the local oil industry. In fact, Biden has shown considerable concern for the job losses in this sector, caused by a fall in profitability amongst these companies due to lower oil prices. A win for Biden would be perceived as an advantage for the oil market and could mean a return of crude to pre-crisis levels of around $50 per barrel. However, for this, a return to normality with more stabilised demand levels would also be necessary," he added.
Kirbaj expects Opec may intervene if crude falls. "Once the Covid-19 vaccine materialises, demand is likely to improve, but the reality is that the pandemic has changed global energy markets, behavior, and consumption," he said.
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