How will the US presidential election affect the price of gold?
The US midterm elections are just around the corner. Congressional seats will be up for grabs in November, which will help determine whether Democrats remain in power or whether Republicans retake either the House or Senate. A change in the power structure can usually affect riskier assets as most investors believe that a divided government will do nothing, and the lack of change may not adversely affect investments. Markets are likely to become more volatile ahead of the election as the outcome will not be known until all votes have been counted. Gold has historically been a safe haven asset that can withstand some of the volatility associated with new or consistent government.
What happens with a divided legislature
In November, US voters will go to the polls to vote on several candidates in the legislative session. The U.S. federal government is divided into three equal parts. There is the executive branch, which is the President of the United States. There is the judiciary, which includes executive-appointed judges at the federal level. Finally, there is the legislature. The legislature votes on new laws to implement once the President of the United States has signed them into law. The legislature is divided into the House of Representatives and the Senate. Each state has two senators. A US state has multiple members of Congress based on the state’s population.
For a law to be passed in the United States, it must be approved by both the House of Representatives and the Senate, and then signed by the President of the United States. The judiciary interprets these laws. The importance of a majority in the House or Senate can drive politics. The Speaker of the House or Senate does not have to introduce legislation and can therefore determine what has any chance of becoming law. If the branches (the House and Senate) or Congress and Executive are divided, many new laws are unlikely to be passed.
Historically, the S&P 500 has performed well when a divided Congress exists. The leading index S&P 500 has developed above average in the years of a divided congress. Until the last midterm elections in 2020, the The S&P 500 index has been higher for the past 10 times when Congress was divided.
How is gold affected?
Investors will also assess how other assets will handle the midterm elections. gold trading could be at the fore when investors are looking for investments that could outperform ahead of a volatile situation.
Conducting a seasonal study of gold prices
One way to determine how gold prices might react to the US election is to look at a seasonal study. seasonality is a study that looks at historical data and determines whether regular patterns occur. When fluctuations in the data are predictable, you can say that the data is seasonal. A seasonality study of gold prices was conducted to determine whether gold prices are seasonal around or after the election.
*Source stock charts
For the past 20 years, gold prices have traded under pressure ahead of the election cycle. Presidential elections, which also include congressional elections, are included in the examination of the last 20 years. Before the election, the price of gold was down 44% of the time over the last 20 years, with an average loss of 2.3%. In the month of election (November), gold prices are generally moving higher, rising an average of 1.8% for an average gain of 1.8%.
The most exciting number comes when new congressmen take office during the election year (every two years) in January. After an election, it takes about two months for previously elected officers to wind down their business and hand over their offices to newly elected officers. During this time, the Congress or Executive Branch is referred to as a lame duck. A lame duck is an official who holds a position but takes no new action.
Historically, when new officials take office in Congress or the White House, there seems to be robust movement in the price of gold. Gold trading for the past 20 years experienced an upward trend in January. Historically, gold prices have risen nearly 5% on average in January, rising almost 80% of the time. January seems to be the busiest month of the year in US election years.
The final result
The result is that there is likely to be volatility in gold trading ahead of the midterm elections in the United States. Stock prices tend to outperform when there is a divided Congress as investors believe little is being achieved and this knowledge provides a stable background for investing in riskier assets. Historically, the S&P 500 has performed well during these periods. Gold prices appear to be underperforming ahead of the election when the president or most congressmen are to be elected. A seasonal study shows that gold prices do best in January, when newly elected officials take office. Historically, January has been the best month during these periods, rising almost 80% of the time with an average gain of 4.8% (see chart).
Of course, these stats are never to be taken as a guarantee of future performance and are for reference only to make more informed trading decisions.
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