- October 20, 2016 -
This year’s presidential elections may have serious implications for the gold market since historically elections tend to influence financial markets as a whole. There are several theories about such an impact.
For example, according to the theory of the presidential election cycles, U.S. stock markets are weakest in the year immediately following the election of a new president. Thereafter financial markets generally improve until the cycle repeats itself with the next presidential election.
Since many believe gold is negatively correlated with the stock market, its price should move in the opposite direction of stocks during the presidential cycle. However, the price of gold is completely uncorrelated with the stock market and thus, not affected by swings in equity pricing associated with presidential election cycles. Instead, history shows a frequent drop in gold prices just prior to the election accompanied by an increase in price after.
While there’s a clear tendency for cycles to repeat, this election is unlike any other. Both candidates are so polarizing that it’s hard to conceive history repeating itself this time around. This year’s election is unique in that, at least outwardly, Ms. Clinton and Mr. Trump have such incredibly different ideas on the direction our country should take.
How would the election of Ms. Clinton affect the price of gold? As you can imagine, there’s no simple answer.
In the long run it’s likely gold would rise as Clinton’s predicted increases in domestic spending would negatively impact economic growth.
Her domestic agenda includes: raising taxes on the wealthy and on investments, raising the minimum wage, expanding Social Security and ObamaCare, and increasing public investment in education, infrastructure and clean energy. The public investment in infrastructure could support GDP growth; many analysts, however, believe her policy initiatives and the deficit spending that will be required to support them will eventually drag the U.S. economy down.
Although there are arguably many risks associated with the financial sector, it’s not likely that Clinton’s public stance on stricter regulations would resolve existing problems. Many analysts feel the U.S. economy is already over-regulated due to the increased regulations enacted during the Obama years. Clinton will continue Obama’s policies, which in the long term will likely hurt economic growth and ultimately be positive for gold prices.
However, compared to Mr. Trump, 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 is more predictable–everyone knows more or less how a Clinton presidency would play out. Therefore, in the short term the price of gold should negatively correlate with the probability of a Clinton election.
If Clinton is elected, expect the price of gold to remain soft until the full impact of her tax and spend philosophy fully plays out. Her recent strength in the polls and subsequent weakness in gold prices may be coincidental but I suspect that trend to continue assuming she wins the election.
In other words, a Trump presidency should initially increase the safe haven status for gold while a Clinton presidency should initially decrease gold’s safe haven appeal. However, a Clinton presidency could offer those interested in precious metals the opportunity to buy gold and silver reasonably, at least early on in her term.
All that being said, those interested in precious metals should not buy gold or silver strictly based on the outcome of this or any election.
One has to look at the fundamentals including domestic and international monetary policies, technical data, supply and demand, international disputes and Federal Reserve actions amongst others that will ultimately determine precious metal values.
By Douglas Trinder
Precious Metals Broker, Jack Hunt Gold & Silver
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