The Influence of US Presidential Elections on Gold Prices
Introduction
The US Presidential election holds significant sway over financial markets, particularly due to the potential shift in fiscal policies accompanying changes in leadership. This impact is especially pronounced in gold prices, which have historically shown a strong responsiveness to macroeconomic landscape changes since President Richard Nixon’s decision to end the Bretton-Woods system in 1971.
Historical Impact of US Presidential Elections on Gold Prices
Despite the common belief that there is a linear relationship between the outcome of the US Presidential election and the price of gold based on party affiliation, historical data offers little evidence to support this claim. The performance of gold has exhibited mixed results across different presidencies. For instance, during President Bill Clinton’s tenure, gold struggled, whereas during President Barack Obama’s time in the White House, gold reached a record high price in 2011. Similarly, gold prices weakened during the Reagan era, but increased during the two terms under President George W. Bush.
It is important to note that attributing market reactions solely based on a candidate’s party affiliation is a nuanced practice. The impact of external fundamental factors, such as seasonality and the economic cycle, must also be considered. Financial markets have experienced both bubbles and crashes during various presidencies, making it difficult to draw definitive conclusions.
Present Conditions and Volatility
In the 21st century, gold prices have exhibited increased volatility. However, it remains to be seen whether this trend will hold for the 2020 election, given the economic shock caused by the ongoing COVID-19 pandemic, which has clouded the macroeconomic outlook.
Tracking Performance of Gold Prices in Election Years
An analysis of gold price performance in election years since 1980 offers insights into trends and patterns. On average, gold tends to rally at the start of the year but experiences a decline in the second half, leading to further downward trends in November.
Detailed Analysis of Specific Election Years
1980 – Ronald Reagan (R)
In 1980, the price of gold reached a high of $850 in January. This surge occurred as the Federal Reserve, under Chairman Paul Volcker, aimed to curb inflation by pushing US interest rates towards 20%. However, this rapid increase was short-lived, and the precious metal hit a low of $482 in March. Gold recovered to trade above $600 ahead of the November 4 election but consolidated around $590 by the end of 1980.
1984 – Ronald Reagan (R)
In 1984, gold prices briefly exceeded $400 in March as the Federal Reserve raised the benchmark interest rate above 10%. Despite incumbent Ronald Reagan winning a second term, the price of gold gradually weakened, reaching the yearly low of $308 in December.
1988 – George Bush (R)
Gold prices registered a yearly high of $482 in January 1988. However, the metal dipped below $400 in September as the effective Federal Funds rate increased ahead of the November 8 election. The victory by George Bush had little influence on gold prices, and bullion traded sideways for the rest of the year, closing at around $410.
1992 – Bill Clinton (D)
In 1992, gold held above $350 until March, weakening throughout the first half of the year despite the Federal Open Market Committee (FOMC) continuing its rate easing cycle. The price of gold remained under pressure after Clinton won the presidency, hitting the yearly low of $332 just days after the election. Gold traded within a narrow range for the remainder of the year, ending at around $335.
1996 – Bill Clinton (D)
Gold climbed above $400 during the first quarter of 1996 as the FOMC maintained unchanged US interest rates. However, the precious metal failed to sustain this increase throughout the year, with gold closing at $368 after Clinton’s second term victory.
2000 – George W. Bush (R)
At the start of 2000, gold made a recovery despite the FOMC’s rate hiking cycle from the previous year. The metal briefly traded above $300 in February but declined in the following quarters. The price of gold hit the yearly low of $264 just days after the November 7 election. It saw a modest increase to end the year at $272 as Fed Chairman Alan Greenspan, serving his fourth term after being reappointed by Clinton, maintained stable US interest rates.
2004 – George W. Bush (R)
Gold prices reached as high as $426 during the first quarter of 2004 as the Federal Reserve kept US interest rates at 1.00%. However, Chairman Alan Greenspan’s rate hikes in the second half of the year caused gold prices to slip below $400 before the November 2 election. Following Bush’s second term victory, gold prices increased, reaching the yearly high of $456 in December.
2008 – Barack Obama (D)
In 2008, the price of gold briefly climbed above $1000 in March as the FOMC responded to the sub-prime housing crisis by lowering US interest rates. However, gold traded as low as $721 ahead of the November 4 election, despite two separate rate cuts delivered by Chairman Ben Bernanke in October. Gold hit the yearly low of $712 just after Obama’s election victory and went on to recover, closing out the year around $882.
2012 – Barack Obama (D)
Gold prices started above $1600 in 2012, reaching as high as $1781 in February. However, the price declined to the yearly low of $1540 in May despite the FOMC maintaining near-zero US interest rates. Gold prices recovered as the November 6 election approached, trading back above $1700. Nevertheless, the rebound faded, and gold ended the year near $1675.
2016 – Donald Trump (R)
In 2016, gold began the year below $1100 as the FOMC, led by Chair Janet Yellen, increased US interest rates at the end of 2015. Gold reached a high of $1366 in July as the central bank maintained the Federal Funds rate in a range of 0.25% to 0.50%. However, gold slipped below $1300 prior to the November 4 election, and Donald Trump’s victory failed to bolster the precious metal’s price. Gold closed out the year around $1148.
Conclusion
Although many assume a strong correlation between gold prices and US Presidential elections based on party affiliation, historical data presents a mixed picture. It is crucial to consider external factors like seasonality and economic cycles when interpreting market reactions. The volatility of gold prices has increased in the 21st century, and the impact of the 2020 election remains uncertain due to the ongoing COVID-19 pandemic. Nevertheless, gold has been trading at record highs this year, emphasizing the need for careful observation of future trends.
Written by David Song, Currency Strategist