Elections always tend to influence financial markets in either a positive or negative way, mainly depending on the general perception as to whether the incumbent in the White House is going to be a change for good, or not as the case may be.
There are some interesting historical precedents when it comes to stock market reactions immediately after a presidential election, which in turn, has a definite influence on other financial instruments and markets, such as the price of gold.
You might be surprised to discover that every US election staged since 1888, has resulted in average stock market decline of about 0.5% in the first three days of the first new presidential week. The longer term outlook if you are looking at statistics, is that stocks have historically fared better over the full four-year term, when a Democratic administration has taken up residence in the White House.
The trouble with historical statistics and precedents, is that there may well be a point where markets don’t react in the way you expect them to, next time around.
That could certainly be the case when you have two front-runner candidates for the White House, who polarize opinion. If Mr Trump swept to power, all previous bets could be off.
So the question is, if there is uncertainty or optimism when the U.S election result is known, what will be the impact on the price of gold?
This graph (courtesy of The Real Asset Co) asked the question, which President was worst for the dollar, measured by percentage rise in gold prices?
You can see that Obama had a positive influence on the price of gold, especially when he was granted a second term. In fact, the history is that Democratic presidents send gold prices up and the dollar down, although if you want an even more positive buy signal, 2nd term Presidents in general, tend to send gold prices higher and push the dollar down lower.
There is no question that election cycles do have an impact on where the price of gold is headed.
The price can often be considered as a response to a situation such as when the economy is seen as artificially strong, in an attempt to influence the intentions of the voting electorate. Whether you take a cynical view or not about the idea that the economy is sometimes stimulated for the purpose of trying to sway an election, there is no question when you look at past results, that when the economic news is favorable, the price of the dollar will often rise and gold prices will stand still or maybe even fall slightly.
If you are a believer in history repeating itself, you can find plenty of examples of election year price volatility for gold. If you take the last three elections in 2004, 2008 and 2012 for example, the 12-month period leading up to each election have all resulted in a drop in gold prices just prior to the election.
Gold has traditionally been regarded as a safe haven in challenging economic times and therefore if there is a positive outlook just prior to an election, it is a predictable consequence that the gold price would come under pressure.
Politics creates price sensitivity
Political maneuvering can be responsible for gold price volatility, just as much as economic conditions influenced by other factors.
Gold prices are no different to stock market indexes, in as much as they are both sensitive to political and economic indicators and events. When the national debt figure is considered to be high enough for concern, when inflation is running high, or when unemployment figures make uncomfortable reading, these are just some of the factors that could push gold prices up.
Some speculators even go as far as to consider gold pricing to be strongly linked to the fortunes of a political party, and there is some statistical evidence to support this line of thinking.
Taking everything into consideration, the bottom line would appear to be that whoever wins the keys to the White House, the price of gold is likely to go up. By how much, would probably be dependent on a number of crucial factors, such as who gets in and how markets react to their appointment.
History shows us that the price of gold will often rise in the days following a US election, by how much, will mainly depend on who wins the vote to govern.