A brave new world
Given the US's pivotal role in the global economy, coupled with the prevailing geopolitical uncertainties, the upcoming presidential election is viewed by many as a watershed moment with far-reaching implications.
As it stands, Republicans led by Donald Trump are ahead in the polls, but the outcome is far from secured. Furthermore, the recent events in the campaign trail – both the assassination attempt on President Trump and President Biden stepping down from the presidential race – have increased the level of uncertainty for an already divided US electorate. In this context, investors are asking about the effect of the election on gold.
Our analysis suggests that while US gold bar and coin demand seems to increase, on average, during Democratic presidencies, this is not the case with other segments of investment demand. In addition, party affiliation does not have a consistent impact on price during US elections. Instead, economic policies, both domestic and foreign, of any given president are more relevant to the behaviour of financial assets, including gold. And while, historically, the US election has not been seen as a geopolitical risk, both the world and the US electorate remain highly polarised. This in turn highlights the need for robust hedges in investor portfolios, a role that gold fulfils effectively
US elections impact on gold price performance
Our analysis suggests that, historically, gold tends to perform below its long-term average in the period around the US presidential election. But this result has not been particularly consistent.
There are two opposite trends. Gold appears to do slightly better six months before a Republican president is elected and it remains flat in the period post-election. Conversely, gold tends to underperform before a Democratic president is elected and perform just below its long-term average in the six months post-election.
However, none of these results are statistically significant. There are few observations for each of the cases analysed and there is significant variability within the results.2 This may suggest that gold is not responding to the party affiliation of an elected president but, more likely, to the expected effect of specific policies.
This is also evidenced by the fact that gold does not consistently outperform during the full term of a president from one party over another.
Gold’s average long-term performance compared to performance around presidential elections
In addition, while our analysis shows that US demand for bars and coins notably increases during Democratic presidencies, this alone is not enough to solely dictate the direction of gold (see Appendix, p5) especially since this result is not replicated in either US gold ETFs flows or positioning in COMEX futures.
Overall, 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.
Is there a crystal ball this time?
Notwithstanding gold’s general behaviour during elections, this time we have the added advantage of knowing how gold performed during the previous Trump administration. Even though Biden is now not running for re-election, we can analyse the behaviour of gold under his presidency assuming there will be a continuation of his policies under a new Democratic administration.
Gold did well during both Trump and (so far) Biden presidencies through a combination of policy decisions and broader global macroeconomic drivers.
Gold rose by 60% during Trump’s presidency – increasing by nearly 30% pre-COVID and slightly over 30% during the pandemic. Under Biden, gold moved sideways initially, but has gained more than 30% during the term so far, primarily due to broader macro factors and central bank buying.
US elections and geopolitical risk
Our analysis has previously shown a direct connection between geopolitical risk and gold. We have found that a 100bps rise in the Geopolitical Risk (GPR) Index,3 holding all else constant, has a c.2.5% positive impact on gold’s return. This reinforces the view that gold tends to be perceived by investors as a safe haven during times of elevated geopolitical risk.
But what does this mean in relation to a US presidential election? Our analysis yields that, historically, movements in GPR around past US elections have not proven to be a major direct driver of the gold price.4 Instead, we believe this form of risk shows up indirectly, and is subject to a time lag based on the market effect of the policies – both foreign and domestic – that a given administration rolls out throughout its term.
Similarly, BlackRock’s recent analysis on its internal geopolitical risk dashboard does not rank the upcoming US election as a top 10 geopolitical risk for 2024.5
Nevertheless, geopolitical risks remain high with little chance of a significant decline in the near future.
For example, if Trump is elected, he will likely confront a more polarised 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 (Chart 5, p4). And a Democratic presidency with similar policies to Biden’s may meet a divided Congress and have difficulty in passing legislation.
Further, BlackRock identifies the foremost concerns this year to be a major cyber-attack, a major terror attack, and US China strategic competition.
All such event risks could encourage investors to include more hedges, such as gold, in their portfolios and could provide support for gold.
Our analysis suggests that the 2016 campaign serves as a suitable proxy for the upcoming election. For example, like 2016, we see a similarly divided electorate for both candidates and a potential shift in the party controlling the White House. Given Trump is currently leading in the polls we can develop a base-case expectation for likely government policy changes post-election This also presents an opportunity for investors who may be underhedged and underexposed to assets like gold.
Comments