As investors closely watch the presidential election race in the world’s largest economy, growing uncertainty has sparked questions about its impact on safe-haven assets like gold.
The price of gold has remained above $2,500 in recent weeks, reaching a new high of $2,521 on August 20.
As of August 29, gold was trading at around US$2,516.
Although elections have not historically had a significant or immediate effect on gold’s performance, some 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 the election of a Republican president and remains stable during the post-election period.
Conversely, it tends to underperform before the election of a Democratic president and performs just below its long-term average in the six months following the election.
However, the WGC reiterated, these results are nuanced.
“There are few observations for each of the cases analyzed and there is significant variability in the results,” he says, instead suggesting that gold likely responds to specific policies rather than affiliation with a party of an elected president.
“This is also demonstrated by the fact that gold does not consistently outperform over the entire term of a president of one party over another,” he said.
Looking specifically at gold’s observed behavior under the previous Trump administration and the current Biden presidency, WGC analysis found that prices increased by 60% during Trump’s tenure.
Namely, prices increased almost 30 percent pre-COVID and just over 30 percent during the pandemic.
When it comes to Biden, the situation is a bit different because he is not seeking re-election, but his policies could continue under a new Democratic administration. The WGC found that gold initially moved sideways under Biden and has since gained more than 30% during his term so far.
These gains were mainly attributed to broader macroeconomic factors and central bank purchases.
Also worth noting, according to the WGC, gold returns declined in the six months following the inaugurations of Trump and Biden, falling 2.6% and 6.4%, respectively.
Growing geopolitical risk
Given the direct correlation between geopolitical risk and gold, the WGC analysis examined whether the US elections could be considered a geopolitical risk for commodity investors.
He noted that, historically, evolving geopolitical risks around recent US elections have not proven to be a major direct driver of gold prices.
“Instead, we believe that this form of risk arises indirectly and is subject to a time lag based on the market effect of policies – both foreign and domestic – that a given administration implements throughout its tenure. mandate,” he said.
Nevertheless, geopolitical risks remain high, he acknowledges, with little chance of a significant decline in the near future.
“For example, if Trump is elected, he will likely face a more polarized world than during his previous term. As such, global markets could be more responsive to the direction of its policies – particularly foreign,” he said.
Similarly, in terms of geopolitical risk indicators, risk levels were significantly lower at the start of Biden’s presidency than they are today, the WGC observed, with risk only increasing ‘as November approaches.
“And a Democratic presidency with policies similar to Biden’s could face a divided Congress and have difficulty passing legislation,” he said.
All of this underscores the need for strong hedges in portfolios, regardless of the U.S. outcome, the WGC said.
“Previous elections did not have an immediate impact on geopolitical risk; rather, they have contributed positively or negatively to the broader risk landscape, with some lag in policy implementation by administrations. And even though gold has not reacted, on average, to the outcome of previous elections, this election could have a more visible effect on investor sentiment,” he said.
This, in turn, “could encourage investors to evaluate how they could mitigate risk in their own portfolios and attract them to a safe haven like gold,” it says.
