Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 383

Republican or Democrat: does it matter for gold?

It’s been just over three months since the gold price traded at all-time highs in nominal terms, hitting US$2,067 per troy ounce on 6 August 2020.

Despite the many tailwinds that drove the gold price to that level, an examination of market history suggested there was too much investor exuberance on the long side of trade at the time and that a period of consolidation was required.

This is evident in the chart below, which plots both the USD spot price of gold and how far the spot price was trading above or below its 200-day moving average (200DMA) on any given day. Data covers from the end of 1999 through to the end of September 2020.

Source: The Perth Mint, Reuters

The chart highlights that there have been several occasions in the past 20 years (in 2006, 2008, 2009 and 2011) when the gold spot price was trading at 20% or more above its 200DMA, which is where it sat in early August of this year.

On each prior occasion that the market ran this hot, it was soon followed by a period of consolidation, declining in the following three months by an average of approximately 10%.

Almost exactly the same thing has happened again this time around. In what was, in many ways, a textbook correction leading into the early November US Presidential election, gold ended October 2020 trading at USD 1,881.90 per troy ounce, 9% below the August 2020 all-time high.

Gold and US Presidential elections

The gold price rallied in the days after voting closed for the 2020 US Presidential election, trading at more than USD 1,950 per troy ounce late last week, up more than 3% from the October close. This proved short lived, with the precious metal falling close to USD 100 per troy ounce on news Pfizer may have successfully developed a COVID-19 vaccine.

As for what happens next, a review of the performance of gold in the aftermath of prior US Presidential elections is one (admittedly imperfect) way of getting a feel for how the precious metal may perform in the period ahead.

Our own analysis based on market movements in the aftermath of every US Presidential election since 1968 suggests that the gold price has on average risen by 5.58% in the year after each election.

There is however a wide disparity within the one-year figures, with a best result of +51.83% (after the 1972 election), while the worst result saw gold deliver a return of -32.67% (following the 1980 election).

The table below highlights the average, the best and the worst returns over one, three and five years for the USD gold price in the aftermath of every US Presidential election since 1968.

Gold price returns

Timeframe

Average return

Best return

Worst return

1 year

5.58%

51.83%

-32.67%

3 years

42.99%

203.42%

-40.52%

5 years

81.66%

342.31%

-49.16%

Source: The Perth Mint, Reuters

State Street global advisors also analysed the performance of gold in various US political environments. Rather than look at one, three and five year returns in the aftermath of each election, they instead looked at average annual returns for gold based not only on which party occupied the White House, but who controlled the US Congress.

The results are displayed below.

 

Party in control

Average annual return (%)

Presidency

Democrat

11.2

Presidency

Republican

10.2

Congress

Democrat

20.9

Congress

Republican

3.9

Source: State Street Global Advisors

The data suggests that whoever occupies the White House has little to no material impact on gold price returns. The table shows that the gold price delivered annual average gains of 11.2% under Democratic Presidents and 10.2% under Republican Presidents.

The data instead indicates that it is far more important who controls the US Congress. The gold price has historically risen by more than 20% per annum under a Democrat-controlled US Congress, in comparison to an increase of just 3.9% under a Republican-controlled US Congress.

Interestingly, the worst environment for gold has been when the US Congress isn’t controlled by either party. In such environments, the gold price only saw average annual increases of 3.5%.

Ignore the election noise

While the above analysis provides some interesting insights, it is no guarantee of what will transpire in the years to come.

As such, we think investors are better served focusing on the other macroeconomic, monetary and market forces that may impact their portfolios going forward. In doing so, we believe many will conclude that irrespective of the US political environment, there are multiple factors supporting gold and the role it can play in a portfolio.

Monetary policy remains a key tailwind, with the decision last week by the Reserve Bank of Australia to cut interest rates, target lower bond yields and launch an AUD 100 billion Quantitative Easing program an illustration of how much easy money will be injected into the financial system in the years to come.

Real rates on cash and much of the fixed income universe will remain negative for years to come.

Gold should also be supported by investors looking to hedge against equity market risk, which remains high. This is driven by multiple factors, including:

  • The continued threat posed by COVID-19, the spread of which has worsened in developed market economies in the Northern Hemisphere over the past month. Pfizer’s news about a vaccine is a welcome development, but it’s not an immediate cure to the pandemic.
  • Equity market valuations, which remain stretched by historical standards.
  • Potential for ongoing political gridlock in Washington.

Trade tensions are also likely to remain, even if the rhetoric is dialled down with a change in the White House. These ongoing pressures, coupled with the supply chain concerns posed by COVID-19, suggest that inflationary risks may be more apparent than the market is currently anticipating, despite the very real demand deficit that exists in the global economy today.

 

Jordan Eliseo is Manager of Listed Products and Investment Research at The Perth Mint, a sponsor of Firstlinks. The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances.

For more articles and papers from The Perth Mint, click here.

 

RELATED ARTICLES

Is gold a growth or defensive asset?

The outlook for gold in a post COVID world

Are bank deposits and gold safe havens?

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.