US Elections: Gold May Glitter. Oil & Gas is Murkier

Some of the hallmarks of active natural resources investing are 1) wide return dispersion from idiosyncratic drivers and 2) the significant effects that geopolitics have on underlying supply and demand dynamics.

As the US election cycle enters its final stretch, these dynamics are intensifying and will leave commodities winners and losers in their wake.

We look ahead at what a Democratic or Republican win will bring for commodities and why we expect gold and renewables to prevail either way.

Global geopolitical volatility – trade, currency, and physical wars

Global geopolitical tensions will see short-term ebbs and flows, but the longer-term trend of increased fragmentation and multi-polarisation seems inevitable. This will have nuanced effects across sectors, but both parties are likely to maintain a protectionist stance:

• Under a Republican administration, relations with China may become more strained and we may potentially see an escalation of trade and currency conflicts. Although China depends on raw commodity imports, its dominance in processing capacities remains a strategic asset. Furthermore, China could use rare earths and refined metals for economic leverage, but a full weaponisation remains an extreme scenario
• More hawkish Middle East policies driven by a Republican administration may further escalate tensions with Iran and its allies. However, any impact on oil prices might be tempered by friendlier Republican relations with Saudi Arabia
• A Republican win might de-escalate the Russia-Ukraine conflict, but it’s unlikely to lead to a sudden flood of Russian commodities onto global markets

Gold is still a safety net

In the metals sector, election policy changes could lead to regional strengths and pricing differences as protectionist measures impact certain ferrous and base metal markets.

Gold stands out to us as a clear winner, because political trends suggest ongoing fiscal indiscipline, a risk of increased global fragmentation, persistent geopolitical conflicts, and a gradual shift away from reliance on the US dollar.

Clean energy can count on bipartisan support

Contrary to popular belief, a Republican victory may not be detrimental to renewables, and they are unlikely to take a hatchet to outgoing President Joe Biden’s Inflation Reduction Act, which has been the key driver of green projects in recent years. While a Democratic win will be a clear positive for clean energy, the reality suggests a Republican win is not necessarily universally negative for the sector.

Clean energy and its economic impact are firmly entrenched in many historically red states – Texas for example has installed more solar capacity than California in recent years. More than 70% of planned clean energy manufacturing is located in red states (Republican governors and congressional districts), highlighting the sector's significant bipartisan support.

The sector’s economic clout is often under-appreciated. According to 2022 figures from the Interstate Renewable Energy Council, the 260,000 solar energy jobs vastly outnumbered those in direct oil and gas extraction (112,000).

The winners and losers in the space will be determined by policy nuances towards protectionism. This could lead to restricting the import of Chinese solar components, benefiting domestic manufacturers and creating local jobs.

The good and the bad for oil and gas

Potential policy shifts affecting the oil and gas industry will have a mixed impact. While the sector may not benefit uniformly, specific subsectors could emerge as winners based on how global events unfold.

A Republican administration may favour traditional energy companies, but the "drill, baby, drill" approach could harm oil and gas prices.

However, we believe there is a low chance of US exploration and production (E&P) companies reacting with more activity as shareholders have grown accustomed to production discipline and enhanced shareholder returns.

Furthermore, increased US drilling could draw the ire of Saudi Arabia and OPEC. As the 2014-2015 oil war has shown, Saudi production policies can easily overwhelm the US shale production machine.

Another scenario could see Iranian and Venezuelan oil further restricted from global markets in favour of US production.

Challenges and opportunities

As the US election draws nearer, the interplay of politics and commodities investing presents challenges and opportunities. We believe gold and renewables are well-positioned to benefit from current trends, while the broader landscape requires careful navigation of protectionism and policy change.

Time to Split: Bonds and Equities Decoupling?

Throughout 2024, elections, rate cuts, and disinflation have dominated the market narrative. However, a subtler trend that has received less attention is the decoupling of bond and equity performance.

Traditionally, these asset classes have been seen as effective counterbalances: equities offer growth potential, while bonds provide a steady, income-driven return stream. Yet, in recent years, particularly in the 2020s, we've observed a modest positive correlation between the two. This has primarily arisen from growing concerns around inflation and hawkish central bank policies, notably from 2022 onwards.

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This correlation, coupled with high inflation, has challenged the case for fixed income in recent times. However, as the US Federal Reserve begins its rate-cutting process and inflation normalises, we may be witnessing the beginning of the end for this "short-term" relationship. A short-term indicator of this shift is the rolling one-month correlation, which has been trending downwards in recent months and has now hit its lowest (most negative) figure since the tail-end of last year’s financials sell-off.

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While it might be too early to declare an end to this "partnership," the combination of dovish central bank policies and lower inflation could mean that bonds and equities might return to their negatively correlated norm. Time will tell if this decoupling is beneficial for investor diversification.

With contributions from Albert Chu, a portfolio manager focusing on natural resource strategies at Man Group and Jon Lahraoui, director of Discretionary credit at Man Group..