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 the 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 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 greater than the differences between technical patterns. It seems that this year 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: Donald Trump and Hillary Clinton. How the election of the latter would affect the price of gold? Well, it is not easy to say.
In the long-run, the gold may gain, as Clinton’s economic program would lower economic growth. As a reminder, she wants to increase taxes on the wealthy and on investment (that are already too high), raise the minimum wage (which is already too high), bring back the labor unions, expand Social Security and ObamaCare, and increase public investment in infrastructure, education and clean energy. The public investment in infrastructure could support GDP growth, however, we believe that her economic policy would generally deteriorate the U.S. economy. Although we agree with her that there are many risks associated with the financial sector, we are not sure whether stricter regulations would solve the problem. The U.S. economy is over-regulated due to the escalating regulation under Obama. Clinton will probably continue Obama’s stance, which would be negative for the economy and, thus, positive for the gold prices.
On the other hand, Clinton is the establishment candidate. She was the First Lady, the Secretary of State, the Senator from New York, she gives speeches to large Wall Street banks. Compared to Trump, Clinton ensures stability and predictability, everyone know more or less what to expect of her. Therefore, in the medium- and short term, the price of gold should be negatively correlated with Clinton’s odds for winning the nomination and, later, the presidency, as her election would be considered a safer bet. In other words, Trump’s favorable polls should increase the safe-haven demand for gold, while Clinton’s favorable polls should decrease gold’s safe-haven appeal.
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.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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