Show Transcript
The U.S. election is still several months away, but there is already speculation about what the results could mean for markets, including commodities. Bart Melek, Global Head of Commodity Strategy at TD Securities, speaks with MoneyTalk’s Greg Bonnell about the various market scenarios.
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Although it's still several months away, investors are increasingly focusing on what the US presidential election could mean for different asset classes, including commodities. Joining us now to discuss, Bart Melek, global head of Commodity Strategy at TD Securities. Bart, great to have you back on the show.
Wonderful to be back. Thank you for inviting me.
As luck would have it with this topic, I believe you just published a report on this scenario. So let's dig in. We're still, as we said, several months away, but investors are asking these questions. What could it mean?
Well, I did indeed publish a few weeks ago. And first of all, I want to say, it's complicated because we have no idea, really, who's going to take the White House. And certainly, we all have private opinions, but I certainly don't feel qualified to calling who's going to win, who's going to take the House or the Senate. But we can go through some scenarios of what it could potentially mean for various commodities.
The general view on my end is that if the Republican Party takes over as the governing party in the United States, if they control all the houses and the presidency and the White House, it probably means less environmental spending than before. Of course, the Biden administration has had a historic passing of the Inflation Reduction Act, which allocates hundreds and hundreds of billions of dollars to initiatives like subsidies for battery-operated vehicles, new non-CO2 generating capacity.
And that could be solar. That could be wind. There is nuclear power-transmission lines investment directed towards charging stations for EV's, all sorts of spending like that. And we think that it is a Republican administration that ultimately takes over or control of the Senate and the presidency. Maybe on the margin, there will be less allocation. And that has specific implications for copper, silver, and all the other metals that are associated with the drive towards a net-zero economy. And of course, there would be implications for the oil sector as well.
That's what I find fascinating about this, because it's not simple to say, this kind of a White House means this for commodities. Well, it depends what commodities you're talking about, whether it's a Biden administration for a second term, whether it's a return of a Trump administration. So dive a bit deeper into that, because you said, obviously, if there's not a big of a push for electrification, then we're seeing some minerals like copper and others. But then the oil and gas side could be looked upon perhaps more favorably in a Republican--
Absolutely. And one thing that you don't need any legislation is regulatory action or executive action from whoever the sitting president is. And that brings me immediately to CAFE standards or pollution standards. And it is likely that if a Republican sits in the White House, it could very well mean that those standards aren't going to be as ambitious as they are now eight years out.
What are the implications for that? Well, right now, under the current plan, people are estimating that some 60% of new vehicles in the next eight years or so, being sold, 20, 30 or so targets, it could be BEV's, battery-operated electric vehicles. If that standard isn't enforced or if that standard is changed or made not obligatory, I don't know what form that will ultimately take. That will depend on actually specific policy.
What could it mean? Well, it could mean that you are using less metals that are directed to these pure EVs. Copper is number one. There is much more copper being used, some 52 kilos or so, for an electric vehicle than a standard ICE vehicle. Of course, lithium and cobalt and other metals as well. And that means, at least in the US market, while there probably still will be growth-- we're still seeing growth right now. But it is already happening that their consumers are having distance anxiety.
People are worried about the lack of charging station. And infrastructure associated with it doesn't really exist yet. And we're seeing the rate of sales lower. We're hearing of inventories growing. And we're already starting to see that. What happens if the funding doesn't materialize or if these standards are diminished?
I want to ask you about the difference between government policy and where industry and society is headed. I mean, obviously, you can't separate the two because there have been incentives that I think that have gotten some buyers into the market for EV's either.
That's right. If they disappear, probably a lot of the demand will. And I don't even think that's a function of people not wanting to, but it's an affordability question. They're significantly more expensive than your standard vehicle. On the other hand of the argument, there's a positive. Chances are, if you're not going pure EV, you're probably not also fully eliminating the drive to higher efficiencies, well, you probably are going to be using more hybrid vehicles to achieve that.
And those are either plug-ins, smaller batteries but still have them, or maybe these kinetic ones that aren't plug-in, but are more efficient. Well, what that means is probably platinum and palladium would do a lot better than under the other scenario because the loadings would be the same as a standard vehicle. But you also have batteries accompanying them as well.
So maybe on the margin, less demand. We still think demand would outpace supply over the long-term-- under both scenarios. But clearly, one regime in government is much more accretive for the metals like copper and lithium, and silver, than the other. But that doesn't mean it's an outright negative. So I think it's all positive broadly, but it's just degrees of it. I warned the viewers and you, it is quite complicated.
Yeah. I was going to ask you, because investors like to get ahead of things. This seems to be a hard one to get ahead of because you said, we don't have the crystal ball. We can't say who's going to be in the White House after November. So simply, there are scenarios that you can consider, but it's pretty hard to say this, this, and this means this.
Yeah. It's a tough one because you don't know how policy is going to fall out. And for all we know, there might would be intensive lobbying from the industry to continue part of what's been happening under the Biden administration into any possible Republican future as well, because they've made commitments already and spending. So they might not want to write them off just quite yet. And in addition to industrial metals and oil, there are implications for something like gold.
We're seeing astronomical debt levels in the United States and massive projections for deficits over the next few years. And in fact, deficits over the next 30, according to the Congressional Budget Office. I'm laughing a little bit because they are big numbers. We're talking 34 billion right now, which is going to grow. We're looking at another 1.6, not billion, trillion. Another $1.6 trillion of deficits over the next few years, 1.8, 1.6. So a lot of deficits over a long time.
Under Trump?
The candidate. It likely would be that those astronomical deficits would be even bigger.
You start delivering tax cuts for corporations.
Right.
Less revenue coming in.
And I haven't really heard very much on the revenue increase side. You've heard the opposite. It's quite different on the Democrat side. They're actually talking about higher taxes down the road. We certainly haven't seen any plans at this point to cut expenditures in any material way. So deficits would likely grow. Well, what does that mean? Ultimately, it means that the economy could very well function beyond capacity for prolonged periods. That typically implies higher inflation and probably higher interest rates, but not necessarily in real terms because the Fed might very well want to accommodate full employment mandate. Remember, the Federal Reserve has a dual mandate, full employment and price stability. Well, at this point, they seem very much skewed towards one. But that doesn't necessarily mean they won't try to juice up the economy should things slow down.
And if they don't hit the 2% inflation target for a while or elevated above 2% for a while, they may not be concerned. Well, that is a beautiful story for gold. And I think part of the reason central banks are buying right now, because they're quite concerned that over the long run, US deficits are going to be out of control, and they might be even under bigger out of control scenario.
If we have the Republicans take over and that could mean a stealth form of monetization, which ultimately prompts investors and central banks to allocate more gold in their portfolio mix of foreign exchange, FS portfolios. We've already seen gold benefit from central banks like the People's Bank of China and other central banks buying record amount of gold over the last two years. Looks like there are strong buyers right now. In fact, China had another 17 month of consecutive purchases. And if that accelerate Federal Reserve easing, it could very well mean that gold goes up even higher. And in fact, we're talking about $2,400, $2,500 from a trading perspective next six, nine months, maybe even sooner. And there's another scenario. Right now, the China-US relationship is not very friendly, but I think it's been the aggression and the narratives are being pulled back a little bit, I think, under this president.
Certainly from the statements made by Mr. Trump and some of his advisors point to a more adversarial relationship. We don't know what's going to happen. But if that's the case, retort over Taiwan, South China Sea, military deployments, trade restrictions, tariffs, that all might come to a bigger front than it is now. And that could very well prompt China, which only has a small amount of reserves in gold, something like 4.3% or so, to really, really get more aggressive.
Remember, they have about $3.2 trillion in reserves, most of it US dollar-based. And if the situation gets out of hand, who knows? They might be fearful over sanctions. We're not predicting sanctions. We're not predicting any sort of military conflict. But we're just saying that there could be more tension. And the risk of that is higher than it would be under a Biden administration. And that means more potential demand from the official sector, particularly from countries that aren't particularly affiliated with the United States or the western world.
So those are very, very interesting developments that could occur before and after the elections, because as we get closer to November, when people cast their vote, I think it's going to get very, very, very interesting. I think people are going to get into debates. You're going to have the temperature of the debates rise quite a lot. People are going to, I think, take maybe more extreme sides of the argument on either side. And I think that's probably going to move markets. Gold certainly comes to mind as one of those markets.
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Although it's still several months away, investors are increasingly focusing on what the US presidential election could mean for different asset classes, including commodities. Joining us now to discuss, Bart Melek, global head of Commodity Strategy at TD Securities. Bart, great to have you back on the show.
Wonderful to be back. Thank you for inviting me.
As luck would have it with this topic, I believe you just published a report on this scenario. So let's dig in. We're still, as we said, several months away, but investors are asking these questions. What could it mean?
Well, I did indeed publish a few weeks ago. And first of all, I want to say, it's complicated because we have no idea, really, who's going to take the White House. And certainly, we all have private opinions, but I certainly don't feel qualified to calling who's going to win, who's going to take the House or the Senate. But we can go through some scenarios of what it could potentially mean for various commodities.
The general view on my end is that if the Republican Party takes over as the governing party in the United States, if they control all the houses and the presidency and the White House, it probably means less environmental spending than before. Of course, the Biden administration has had a historic passing of the Inflation Reduction Act, which allocates hundreds and hundreds of billions of dollars to initiatives like subsidies for battery-operated vehicles, new non-CO2 generating capacity.
And that could be solar. That could be wind. There is nuclear power-transmission lines investment directed towards charging stations for EV's, all sorts of spending like that. And we think that it is a Republican administration that ultimately takes over or control of the Senate and the presidency. Maybe on the margin, there will be less allocation. And that has specific implications for copper, silver, and all the other metals that are associated with the drive towards a net-zero economy. And of course, there would be implications for the oil sector as well.
That's what I find fascinating about this, because it's not simple to say, this kind of a White House means this for commodities. Well, it depends what commodities you're talking about, whether it's a Biden administration for a second term, whether it's a return of a Trump administration. So dive a bit deeper into that, because you said, obviously, if there's not a big of a push for electrification, then we're seeing some minerals like copper and others. But then the oil and gas side could be looked upon perhaps more favorably in a Republican--
Absolutely. And one thing that you don't need any legislation is regulatory action or executive action from whoever the sitting president is. And that brings me immediately to CAFE standards or pollution standards. And it is likely that if a Republican sits in the White House, it could very well mean that those standards aren't going to be as ambitious as they are now eight years out.
What are the implications for that? Well, right now, under the current plan, people are estimating that some 60% of new vehicles in the next eight years or so, being sold, 20, 30 or so targets, it could be BEV's, battery-operated electric vehicles. If that standard isn't enforced or if that standard is changed or made not obligatory, I don't know what form that will ultimately take. That will depend on actually specific policy.
What could it mean? Well, it could mean that you are using less metals that are directed to these pure EVs. Copper is number one. There is much more copper being used, some 52 kilos or so, for an electric vehicle than a standard ICE vehicle. Of course, lithium and cobalt and other metals as well. And that means, at least in the US market, while there probably still will be growth-- we're still seeing growth right now. But it is already happening that their consumers are having distance anxiety.
People are worried about the lack of charging station. And infrastructure associated with it doesn't really exist yet. And we're seeing the rate of sales lower. We're hearing of inventories growing. And we're already starting to see that. What happens if the funding doesn't materialize or if these standards are diminished?
I want to ask you about the difference between government policy and where industry and society is headed. I mean, obviously, you can't separate the two because there have been incentives that I think that have gotten some buyers into the market for EV's either.
That's right. If they disappear, probably a lot of the demand will. And I don't even think that's a function of people not wanting to, but it's an affordability question. They're significantly more expensive than your standard vehicle. On the other hand of the argument, there's a positive. Chances are, if you're not going pure EV, you're probably not also fully eliminating the drive to higher efficiencies, well, you probably are going to be using more hybrid vehicles to achieve that.
And those are either plug-ins, smaller batteries but still have them, or maybe these kinetic ones that aren't plug-in, but are more efficient. Well, what that means is probably platinum and palladium would do a lot better than under the other scenario because the loadings would be the same as a standard vehicle. But you also have batteries accompanying them as well.
So maybe on the margin, less demand. We still think demand would outpace supply over the long-term-- under both scenarios. But clearly, one regime in government is much more accretive for the metals like copper and lithium, and silver, than the other. But that doesn't mean it's an outright negative. So I think it's all positive broadly, but it's just degrees of it. I warned the viewers and you, it is quite complicated.
Yeah. I was going to ask you, because investors like to get ahead of things. This seems to be a hard one to get ahead of because you said, we don't have the crystal ball. We can't say who's going to be in the White House after November. So simply, there are scenarios that you can consider, but it's pretty hard to say this, this, and this means this.
Yeah. It's a tough one because you don't know how policy is going to fall out. And for all we know, there might would be intensive lobbying from the industry to continue part of what's been happening under the Biden administration into any possible Republican future as well, because they've made commitments already and spending. So they might not want to write them off just quite yet. And in addition to industrial metals and oil, there are implications for something like gold.
We're seeing astronomical debt levels in the United States and massive projections for deficits over the next few years. And in fact, deficits over the next 30, according to the Congressional Budget Office. I'm laughing a little bit because they are big numbers. We're talking 34 billion right now, which is going to grow. We're looking at another 1.6, not billion, trillion. Another $1.6 trillion of deficits over the next few years, 1.8, 1.6. So a lot of deficits over a long time.
Under Trump?
The candidate. It likely would be that those astronomical deficits would be even bigger.
You start delivering tax cuts for corporations.
Right.
Less revenue coming in.
And I haven't really heard very much on the revenue increase side. You've heard the opposite. It's quite different on the Democrat side. They're actually talking about higher taxes down the road. We certainly haven't seen any plans at this point to cut expenditures in any material way. So deficits would likely grow. Well, what does that mean? Ultimately, it means that the economy could very well function beyond capacity for prolonged periods. That typically implies higher inflation and probably higher interest rates, but not necessarily in real terms because the Fed might very well want to accommodate full employment mandate. Remember, the Federal Reserve has a dual mandate, full employment and price stability. Well, at this point, they seem very much skewed towards one. But that doesn't necessarily mean they won't try to juice up the economy should things slow down.
And if they don't hit the 2% inflation target for a while or elevated above 2% for a while, they may not be concerned. Well, that is a beautiful story for gold. And I think part of the reason central banks are buying right now, because they're quite concerned that over the long run, US deficits are going to be out of control, and they might be even under bigger out of control scenario.
If we have the Republicans take over and that could mean a stealth form of monetization, which ultimately prompts investors and central banks to allocate more gold in their portfolio mix of foreign exchange, FS portfolios. We've already seen gold benefit from central banks like the People's Bank of China and other central banks buying record amount of gold over the last two years. Looks like there are strong buyers right now. In fact, China had another 17 month of consecutive purchases. And if that accelerate Federal Reserve easing, it could very well mean that gold goes up even higher. And in fact, we're talking about $2,400, $2,500 from a trading perspective next six, nine months, maybe even sooner. And there's another scenario. Right now, the China-US relationship is not very friendly, but I think it's been the aggression and the narratives are being pulled back a little bit, I think, under this president.
Certainly from the statements made by Mr. Trump and some of his advisors point to a more adversarial relationship. We don't know what's going to happen. But if that's the case, retort over Taiwan, South China Sea, military deployments, trade restrictions, tariffs, that all might come to a bigger front than it is now. And that could very well prompt China, which only has a small amount of reserves in gold, something like 4.3% or so, to really, really get more aggressive.
Remember, they have about $3.2 trillion in reserves, most of it US dollar-based. And if the situation gets out of hand, who knows? They might be fearful over sanctions. We're not predicting sanctions. We're not predicting any sort of military conflict. But we're just saying that there could be more tension. And the risk of that is higher than it would be under a Biden administration. And that means more potential demand from the official sector, particularly from countries that aren't particularly affiliated with the United States or the western world.
So those are very, very interesting developments that could occur before and after the elections, because as we get closer to November, when people cast their vote, I think it's going to get very, very, very interesting. I think people are going to get into debates. You're going to have the temperature of the debates rise quite a lot. People are going to, I think, take maybe more extreme sides of the argument on either side. And I think that's probably going to move markets. Gold certainly comes to mind as one of those markets.
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