2016 is an U.S. presidential election year. This is an important fact for the gold market, because the elections tend to influence financial markets and where the price of gold is headed. There are several theories and stylized facts about such an impact. For example, according to the theory of the presidential election cycle, U.S. stock markets are weakest in the year following the election of a new U.S. president, and after the first year, the market improves until the cycle begins again with the next presidential election. Since gold is believed to be negatively correlated with the stock market, its price should move in opposite direction than the price of stocks during the presidential cycle (the gold market should be strongest in the year following the election of a new U.S. president, and after the first year, the gold market should weaken until the cycle begins again). However, the price of gold is not correlated with the stock market and, thus, not affected by the presidential election cycles in the medium term. Instead, history shows that the gold prices often drop just prior to the elections and rise in the days following the U.S. election.
The problem with historical statistics is that while there is a tendency for the technical patterns to repeat or to be self-similar to a great extent, this doesn’t have to be the case with patterns based on specific presidential candidates, as the differences between them can be much bigger than the differences between technical patterns. It seems that this year the candidates are very different than those who were candidates in the past. The current elections are unique, because we have two front-runner candidates for the White House who have very polarized opinions: Hillary Clinton and Donald Trump. The latter is also an outsider (like Bernie Sanders) and an anti-establishment candidate, without a specific economic program. This is why his candidacy makes it difficult for investors to assess the financial implications of the next administration.
What we know is that Trump is a right-wing populist who wants to impose huge import tariffs, which would reduce the benefits of trade and make foreign goods more expensive, and limit immigration, which is an important source of economic vitality. Surely, he also proposes a pro-growth tax plan with significant tax cuts, however, it would increase the budget deficit, as Trump does not say anything how to reduce spending to finance tax cuts (he would leave Social Security and Medicare, two of the costliest parts of the federal budget, untouched). However, it is too early to assess his program. We can only say that it would mean greater economic nationalism, which should increase uncertainty among investors and support the price of gold.
The uncertainty regarding the U.S. election should be negative for the U.S. dollar and positive for the yellow metal. However, as the elections approach, the uncertainty should ease (as the parties will choose candidates which will hopefully present more elaborated economic programs), unless Trump gets the nomination and has favorable polls – in such a scenario, nobody would really know what to expect and gold should gain on such uncertainty as a safe haven. All in all, it appears that the relationship between Trump and gold is the following: if Trump wins the election, gold should also shine, at least at the very beginning when the investors would not yet know what kind of policies they should expect from the new president.
In other words, higher odds for Trump winning the election should be supportive for the gold prices, since markets likes stability and predictability, while Trump is a dark horse with unknown economic views and anti-system beliefs, so nobody knows what to expect of him.
However, the impact of the presidential elections on the price of gold is not exact science, since there are many political factors that have to be taken into consideration, such as the political control of both houses of the Congress, the co-operation between the president and the Congress, the fiscal policy, etc. Therefore, long-term investors should not make their decisions based only on the basis of the presidential elections, but always look at the fundamentals, which depend more on the monetary policy and the Fed’s actions, and technicals which can help determine the optimal entry and exit moments.
We encourage you to learn more about the shiny metal – not only how the presidential elections affect the price of gold, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It’s free and if you don’t like it, you can easily unsubscribe.