With investors closely watching the presidential election race in the world’s largest economy, rising uncertainty has prompted questions about its impact on safe haven assets like gold.
Gold prices have held out in recent weeks above US$2,500, hitting a fresh high of US$2,521 on 20 August.
As of 29 August, gold is trading at around US$2,516.
While elections have not, historically, had a significant or immediate effect on gold’s performance, interesting trends emerge when reflecting on the past.
According to analysis by the World Gold Council (WGC), gold appears to do slightly better six months before a Republican president is elected and it remains flat in the period post-election.
Conversely, it tends to underperform before a Democratic president is elected and performs just below its long-term average in the six months post-election.
However, the WGC reiterated, these results are nuanced.
“There are few observations for each of the cases analysed and there is significant variability within the results,” it said, suggesting instead that gold is likely responding to specific policies rather than the party affiliation of an elected president.
“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,” it said.
Looking more specifically at gold’s observed behaviour under the previous Trump administration and current Biden presidency, WGC analysis found prices rose 60 per cent during Trump’s tenure.
Namely, prices increased by nearly 30 per cent pre-COVID and slightly more than 30 per cent during the pandemic.
When it comes to Biden, the situation is a little different because he is not seeking re-election but his policies could continue under a new Democratic administration. The WGC found gold moved sideways initially under Biden and has since gained over 30 per cent during his term to date.
These gains have been attributed primarily to broader macro factors and central bank buying.
Also worth noting, the WGC said, is the fact that gold returns declined during the six months following both the Trump and Biden inauguration, falling 2.6 per cent and 6.4 per cent respectively.
Rising geopolitical risk
Given the direct correlation between geopolitical risk and gold, the WGC analysis considered whether US elections could be deemed a geopolitical risk for commodity investors.
It noted that, historically, movements in geopolitical risks around past US elections have not proven to be a major direct driver of gold prices.
“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,” it said.
Nevertheless, geopolitical risks remain elevated, it conceded, 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,” it said.
Equally, from a geopolitical risk indicator standpoint, risk levels were significantly lower at the beginning of Biden’s presidency compared to where they are today, the WGC observed, with risk only expected to rise heading closer to November.
“And a Democratic presidency with similar policies to Biden’s may meet a divided Congress and have difficulty in passing legislation,” it said.
All this highlights the need for robust hedges in portfolios, regardless of the US outcome, the WGC said.
“Prior elections have not created an immediate impact to geopolitical risk; rather, they have contributed positively or negatively to the broader risk landscape on a lag as administrations roll out policies. And while gold has not reacted, on average, to the outcome of past elections, this election may have a more noticeable effect on investor sentiment,” it said.
Looking forward, it flagged further volatility ahead as election-related uncertainty and geopolitical threats persist.
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”, it said.
