What a Democratic win could mean for metals

As a general rule, the most successful man in life is the man who has the best information

 

2020.06.15

Back in February, the US president dismissed the coronavirus as something happening on the other side of the world, Donald Trump’s impeachment was blocked by the Republican-controlled Senate, and Bernie Sanders was leading the Democratic primaries

As the independent Vermont Senator was making passionate speeches aimed at young, liberal supporters, and leading a whittled-down Democratic field, an Ipsos/Reuters poll showed nearly two-thirds of US voters thought that President Trump probably or definitely will get re-elected in November. 

Indeed the election at that point was Trump’s to lose, especially if Sanders - as much a polarizing figure as the president, his far left politics distasteful to much of the Democratic Party establishment and mainstream voters - was going to be the one taking on Trump. 

Fast forward four months, and the tables have turned entirely. 

Fresh polls indicate Trump’s re-election campaign is in a heap of trouble in Michigan, one of a handful of key states he won in 2016. The EPIC-Mera poll found Joe Biden ahead of Trump by 7 points, more than any other state won by the incumbent four years ago. 

Biden currently leads in Michigan, Pennsylvania, Wisconsin, Ohio, Arizona and Florida. Trump holds a narrow edge in North Carolina and Texas. 

Nationally, the former vice president and presumptive Democratic nominee (after Bernie Sanders bowed out of the race in April) is beating Trump by 8 percentage points on average, according to RealClearPolitics.com. 

Only 42% of Americans approve, and 55% disapprove, of the Trump presidency. This poll was taken amid continued upheaval caused by the coronavirus pandemic, and after the president threatened to impose military order on civilian protests over police killings of blacks.

Two-thirds of people surveyed nationally feel the country is headed in the wrong direction. The sentiment is even stronger in Michigan, where 8 out of 10 independent/ undeclared voters agreed with the statement, “Our pandemic was not managed well and I think he’s paying a big price for that.” 

Numbers reported by the Detroit Free Press show Trump is unpopular among two key constituencies, without whose support he is almost certain to lose on Election Day: women and older voters; both groups have high turnout.  

A New York Times analysis of May and June polls showed Biden leads Trump 59% to 35% among women nationally. While Trump remains the more popular choice for men (49% to 43%), the president trails Biden by 7 points among those 65 and older. 

In Michigan, Biden holds a narrow lead among voters without college degrees, an indication that support from Trump’s “base” may be less sturdy than previously thought. 

Of course the only poll that really matters is the one on Election Day. The idea in trotting out these figures is to plant a seed in the minds of our readers - of the Democrats winning big in November. 

As smart resource investors, we want to be prepared for what six months ago seemed impossible: a Biden/ Harris presidency combined with a Democrat-controlled House and a small Dem majority in the Senate.  

What would this mean for the metals we are invested in? 

Precious metals 

The first thing we want to examine is how a Biden win could affect the US stock market. 

In March, JP Morgan came out with a number of election scenarios that would best serve shareholders. The investment bank’s conclusion? A Biden victory would be better for markets than a Trump re-election, but only if the Republicans hold onto the Senate. 

This seems reasonable. As Business Insider explains,
A Biden victory with a Republican-controlled Senate would boost markets by keeping Trump's tax regime in place while eliminating his "randomly-timed disruptions from foreign/trade policy," the analysts wrote.

Yet a full Democratic sweep of the Senate with a Biden win would bring markets' worst-case scenario, as the party would likely usher in new industry regulations alongside corporate and capital gains tax hikes, the bank said.

Businesses large and small hate uncertainty, and taxes. US stocks continued their decade-long rally following the 2017 Tax Cuts and Jobs Act that lowered the corporate tax rate and triggered increased stock buybacks. If the Republicans retain their lock on the Senate, Trump’s tax regime is likely to remain in place. 

And while Biden has a mixed record on trade policy, he has consistently supported a rules-based international order focused on reducing trade barriers. Removing Trump would do away with a constant trade irritant among America’s trading partners, particularly China, the EU and Canada. 

The prospect of increased and freer trade, possibly a return to global growth, even if the US is not fully out of the covid crisis in November, would also be good for stocks. 

On the other hand, a Democratic sweep of the White House and Congress would hurt asset prices by ushering in fresh corporate and capital gains taxes, the analysts wrote.

Republicans currently have a 53-47 advantage in the upper chamber, meaning Democrats would have to flip at least 3 seats (Vice President votes as tie breaker) to win a majority in the Senate. As for the Democrats holding the House, New York Magazine reports

The suspension of normal politicking (and fundraising) during the coronavirus pandemic… has frozen trends to the benefit of the Democrats defending the turf they won in 2018, making Republican hopes for an upset more improbable than ever...

We agree with JP Morgan that the biggest threat to US (and Canadian) stocks is a Democratic sweep. It’s also the best scenario for gold. 

Gold and silver offer stability during a period of extreme stock market volatility and low bond yields, and while they do not pay interest or dividends, they are not subject to inflation like paper currencies. 

One of the advantages of investing in gold and gold mining stocks is they tend to do well when other assets are tanking. 

The Democrats winning the White House and both Houses of Congress would throw markets into a tizzy, causing investors to clamber for safe havens. Gold is the world’s oldest flight to safety and the logical response to market fear.

Heightened global tensions such as terrorist attacks, border skirmishes, coups, protests and pandemics, scare investors into shifting their funds to precious metals. 

Arguably, installing a Democrat in the White House would also be good for gold because of Biden’s propensity to add to the debt.   

Democrats being the party of big government, we would expect to see increased spending on top of the multi-trillion-dollar stimulus already promised by the Trump administration to deal with the pandemic. 

One year ago, Biden’s presidential campaign announced a $1.7 trillion climate policy to roll back greenhouse gas emissions, followed this year by a $1.3 trillion infrastructure improvement plan. (these policies will be fleshed out further in the next section)

If you think the $25 trillion national debt is unacceptable now, it will likely go even higher under a Biden administration. In an earlier article we showed the close relationship between debt-to-GDP ratios and gold. The lower the GDP and the higher the debt, the better it is for gold. 

According to the World Bank, countries whose debt-to-GDP ratios are above 77% for long periods experience significant slowdowns in economic growth. Every percentage point above 77% knocks 1.7% off GDP, according to the study, via Investopedia. The United States’ current debt-to-GDP ratio is 106.5%.

The longer stimulus measures continue, including a creeping expansion of the Fed’s balance sheet and negative real interest rates (interest rates minus inflation) which are always bullish for gold, we see no reason to doubt that gold will keep climbing. As of May 20, the Federal Reserve balance sheet hit a record $7.09 trillion. 

Energy metals 

As we have suggested, one way to spring the United States from the coronavirus trap is a massive infrastructure spending program, on the scale of President Roosevelt’s “New Deal”.

Trump has talked about reviving a $2 trillion plan, which failed earlier in his presidency, for improving the country’s roads, bridges, water systems and broadband Internet. 

The Chinese have been touting their own form of blacktop politics as a way of restoring their economy, particularly manufacturing which was hurt by the coronavirus. 

And the European Commission released a €1.85 trillion recovery plan focusing on “EU Green Deal” initiatives aimed at reaching the eurozone’s net emissions by 2050 target.

A global infrastructure spending push would mean a lot more energy metals will need to be mined, including lithium, nickel, cobalt and manganese for EV batteries; copper for electric vehicle wiring and renewable energy projects; and rare earths for permanent magnets that go into EV motors and wind turbines. 

Biden’s “green credentials” make him a popular candidate among eco-friendly Democrats and American voters who want to see an acceleration of the shift from fossil-fueled to renewable energies. 

The 77-year-old politician is credited for introducing the first climate change bill in Congress, the Global Climate Protection Act, way back in 1986 - although it died in the Senate. As part of the Obama administration, he supported higher fuel efficiency standards for vehicles, caps on greenhouse gas emissions, and agreed with regulations on coal-fired power plants, the latter replaced with a weaker rule by the Trump administration. 

Dissecting Biden’s record on the environment, Inside Climate News notes that, although he was part of the Obama-era stimulus package of 2009 that included big investments in climate-friendly research and infrastructure, Biden is also tethered to Obama's "all-of-the-above" philosophy, which left ample room for the fracking boom that bolstered one fossil fuel, natural gas, over another, coal, and put the U.S. on track to become the world's leading oil producer.

According to Inside Climate News, Biden wants Congress to pass emissions limits based on the “polluter pays” principle; ; released a policy agenda that boosts the rural economy by paying farmers to store carbon in the soil; and has signaled he will embrace central concepts of the “New Green Deal” - a program first espoused by New York Senator, and Democratic wing-nut, IMO, Alexandria Ocasio-Cortez - including, as mentioned, spending $1.7 trillion over 10 years to achieve 100% clean energy and net-zero emissions by 2050. 

(“AOC” will reportedly serve on a panel helping Biden to develop climate policy.) 

Dubbed “Clean Energy Revolution”, the plan calls for installation of 500,000 electric vehicle charging stations by 2030, and would provide $400 billion for R&D in clean technology. 

Biden clearly favors clean energy at the expense of oil and gas development and production. Among the anti-Big Oil measures, his plan would eliminate fossil fuel subsidies, stop issuing new permits for oil and gas extraction on public lands, and regulate methane pollution. 

A recent survey of Texas oil and gas producers found three quarters are concerned what a Biden victory could mean for their companies. 

A Biden administration would strengthen fuel economy standards - good for platinum group elements used in catalytic converters - and facilitate the electrification of the global transportation system - a shift we at AOTH have been firmly behind since Obama first introduced the idea in 2009. 

Key to Biden’s $1.3 trillion infrastructure improvement plan, is a $50 billion investment in repairs to roads and bridges; $10 billion for transit construction in poor areas of the country; a doubling of BUILD and INFRA grants, and more funding for the US Army Corps of Engineers. 

According to Wikipedia, the plan also includes investments in high-speed rail, public transit, bicycling, school construction, expansion of rural broadband, and replacement of pipes and other water infrastructure. 

It will be interesting to see, if Biden gets elected, whether he revives the Obama administration’s $53 billion proposal to construct an intercity high-speed rail network, which was rejected by Republicans in Congress. 

Copper’s widespread use in construction wiring & piping, and electrical transmission lines, make it a key metal for civil infrastructure renewal. 

A report by Roskill forecasts total copper consumption will exceed 43 million tonnes by 2035, driven by population and GDP growth, urbanization and electricity demand. 

The global 5G buildout and the continued movement towards electric vehicles - including cars, trucks, vans, construction equipment and trains - are two big copper demand drivers. 

Even though 5G is wireless, its deployment involves a lot more fiber and copper cable to connect equipment. 

Electric vehicles and associated charging infrastructure may contribute between 3.1 and 4 million tonnes of net growth by 2035, according to Roskill. EVs contain about four times as much copper as regular vehicles. With each charging station using about 2 kg of copper, that’s 42 million tonnes, or double the current amount of copper mined in one year. 

As for his views on mining, Biden drew criticism at the end of 2019 with some ill-advised comments regarding coal miners. At a rally in New Hampshire, the former vice president said if miners are able to go underground 3,000 feet or throw coal into a furnace, they have the ability to learn how to program, or code, computers - a reference to the need for re-training. Many coal-mining jobs have been lost to tighter air pollution regulations and to cheaper natural gas power plants. 

Unlike Trump, who invited photo-ops with coal miners, Biden’s true feelings regarding mineral extraction have yet to be fleshed out. 

His website says he would set “new common standards for the greening of manufacturing, mining, and tourism,” which appears to be code for more red tape. During his primary campaign in Minnesota, the presumptive nominee neither addressed the Line 3 project by Enbridge, nor the controversial proposed Twin Metals mine. 

Obama’s government canceled the Twin Metals mineral leases and began a study of copper-nickel mining in the Rainy River watershed that could have led to a 20-year mining ban, according to The Minnesota Post. The publication says U.S. Rep. Betty McCollum of St. Paul, who has been an avid opponent of copper-nickel mining near the BWCA, appeared confident a Biden presidency would mirror Obama’s.

Conclusion

Electing Joe Biden to be President of the United States may strike fear into the hearts of oil executives and much of corporate America, but it could actually be good for mining. The best scenario would see the Democrats win the White House and retain the House of Representatives, but fail to dislodge the Republicans from the Senate. This would stabilize stock markets by ensuring that any reversal of Trump’s corporate tax cuts die in the upper chamber.  

We like Biden’s $1.7 trillion clean energy plan and his $1.3 trillion program for infrastructure improvement, both of which should boost demand for copper, used prolifically in construction wiring, plumbing and electricity transmission, and energy metals including lithium, nickel, cobalt and manganese for EV batteries; copper for electric vehicle wiring and renewable energy projects; and rare earths for permanent magnets that go into EV motors and wind turbines. 

The problem with the Democrats is they tend to be anti-mining. If they can be convinced that mining and environmental progress do not have to be mutually exclusive, we may have a winner in a Biden presidency.

Richard (Rick) Mills
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