How will the upcoming presidential election impact the gold market?
President Joe Biden has dropped out of the presidential race. It appears Kamala Harris has the inside track to the Democratic Party nomination, but that isn’t a foregone conclusion. Polling currently shows Trump and the Republicans holding an edge, but we are a long way from November. A lot can change, as the events of the last few weeks remind us.
There’s no way to know exactly how the election will impact gold, but we can identify some historical trends that can help investors as we wade into this sea of uncertainty.
According to a World Gold Council report titled Ballots to Bullion: Examining the U.S. Election’s Effect on Gold, generally, presidential elections haven’t historically had a significant or immediate impact on the gold market. But there are some subtle identifiable trends.
Overall, gold tends to slightly underperform around presidential elections. However, there are some nuances detectable in the data.
Gold has historically performed slightly better in the six months prior to a Republican victory and then traded flat in the immediate aftermath. Conversely, gold tends to underperform in the six months before a Democratic win and trade just below the long-term average within the first six post-election months.
The WGC emphasizes that neither of these trends is statistically significant.
Looking at gold’s performance after the last two elections, we find that during the six months following the Trump inauguration, gold was down 2.6 percent. During the first six months of the Biden presidency, gold fell 6.4 percent.
More generally, the WGC found that gold bar and coin demand seems to increase, on average, during Democratic presidencies, this is not the case with other segments of investment demand.
This dovetails with analysis by Money Metals Exchange Director Clint Siegner.
"Pessimism about where the country is headed has been a major driver in the markets for physical gold and silver. For many, Trump seems to represent the ‘right track.’ His election in 2016 led to a couple of quiet years, and demand is subdued once again with Trump as the front-runner.
"Whomever the Democrats select to replace Biden, the question will be whether they have significantly better prospects to beat Trump in November. If he or she does, expect U.S. investors to buy more gold and silver."
As the World Gold Council report notes, the policies proposed and implemented by the winning candidate will likely have more of an impact on the markets than the party affiliation of the winner.
“Our analysis of gold and US presidential elections suggests that gold is not reacting directly to party affiliation or changes in leadership. Rather, it highlights the relevance of key global macroeconomic drivers of gold’s performance in contrast to specific local dynamics.”
We do have some precedent to lean on going into the 2024 election. We can look back at Trump’s first term to gain some insight into his economic approach, and Biden’s successor on the ticket will likely continue the trajectory of Bidenomics.
We find that gold did well during both administrations. According to the WGC, gold was up 60 percent during Trump’s presidency, increasing by nearly 30 percent pre-COVID and slightly over 30 percent during the pandemic. Under Biden, gold moved sideways initially, but has gained more than 30 percent during his term to date, primarily due to broader macro factors and central bank buying.
Geopolitical risk tends to drive safe-haven demand for gold. According to the WGC analysis, elections themselves don’t tend to increase the Geopolitical Risk Index (GPR), but perceptions around candidates and their policies can exacerbate or calm worries.
According to the World Gold Council, geopolitical risk will likely remain elevated no matter who wins the election.
“If Trump is elected, he will likely confront a more polarized world than during his previous term. As such, global markets may be more reactive to the direction of his policies – especially foreign ones. For instance, recent commentary from Trump on NATO may signal continued geopolitical uncertainty. Equally, from a GPR indicator standpoint, risk levels were significantly lower at the beginning of Biden’s presidency, compared to where they are today; they will also likely continue to rise as the election nears regardless of the candidate behind which Democrats rally. And a Democratic presidency with similar policies to Biden's may meet a divided Congress and have difficulty in passing legislation.”
The Only Certain Thing Is UncertaintyIf the events of the last couple of weeks have reminded us of anything, it’s that nothing is certain but uncertainty.
And there is already plenty of uncertainty and questions surrounding this election.
Who will the Democrats ultimately select? How much impact, if any, will the legal proceedings against Trump have on the campaign? Will there be any economic surprises this fall, and if so, how will they affect the election? Will there be new wars? I could write an endless list of things that could swing the momentum of the campaign.
This means a savvy investor needs to prepare for anything.
The World Gold Council concluded that despite the fact gold hasn’t tended to react significantly to past elections, this one might prove different.
“The outcome of this election may have a more noticeable effect on investor sentiment. A continuation of election-related uncertainty and rising geopolitical threats will add more volatility and likely impact broader macro variables. This, in turn, could drive investors to evaluate how they might mitigate risk in their own portfolios and draw them towards a safe-haven asset like gold.”
Most people acknowledge gold is a safe haven. It serves as an insurance policy during times of uncertainty. But you can’t buy fire insurance when your house is burning down.
A wise investor builds a safe-haven hedge before a crisis erupts. By their nature, black swan events can’t be predicted. You have to be prepared for uncertainty at all times.
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