What will the US election mean for gold?

Hillary Clinton © Getty Images
Will we see another President Clinton?

It looks like it’s going to be Hillary.

At least, that’s what the markets decided yesterday, in the wake of the FBI announcement that her emails showed no criminal wrongdoing.

Both the Dow Jones and the S&P 500 were up 2%, the dollar was up 1% and gold took a 2% slap in the face.

The world isn’t going to end. Business will be as usual. The status quo will prevail.

Really?

Not sure.

But what I’m thinking about is the outlook for gold in all this…

A Trump victory would be good for gold

The question we’re all wondering now is whether we’re going to see a Brexit-type upset in the US election. We’ll know the answer to that by tomorrow.

Yesterday’s markets told us what to expect in the event of a Clinton win, while the previous week’s action – stockmarkets falling and gold rallying as Trump’s odds shortened – tells you what to expect in the event we get Trump.

It’s pretty simple, really. A Trump win is positive for gold. He is so anti-establishment and unpredictable, that nobody quite knows what we will get.

In all probability he won’t be as bad as many fear and nor will he be as good as others hope. But it will be quite some time before the world realises and accepts that, and the insecurity will be gold-positive.

So a Trump win could kickstart the next leg up for gold in this bull market. I have the $1,500 per ounce area as a likely target over the next 12 to 18 months and a Trump win will probably get us close to that within a much shorter timeframe.

Yesterday’s action told you all you need to know about the direction gold will take following a Clinton win, at least in the short term.

The early October lows just below $1,250 will almost certainly be re-tested. We might even see $1,200 (it’s enough to turn you into a Trump supporter).

But the relief many might feel at a Clinton win will pass. Then new trends will have to re-assert themselves. These will be based on the current state of the economy, of the markets, the perceived future success of the markets under the new administration, and so on.

And yet, a Clinton victory won’t cure any of the global economy’s woes

Despite the fact that Asians are the biggest buyers of physical gold, it is Western demand where the price gets set. Gold demand is actually down this year in terms of jewellery (down 21%), technology and central-bank buying (down over 30%). What has pushed the price up has been the extraordinary Western investment demand – which is up almost 100% this year.

That will continue if the price can keep creeping up. A rising price begets a rising price. It will reverse if it doesn’t.

Gold has been in correction mode since it made its high for the year in July at $1,377. A five-month correction is normal in a gold bull market. Indeed, longer corrections are normal. But you want to see signs of stabilisation. A big sell-off following a Clinton win will not help matters.

From a technical point of view, we really need to stay above $1,200, or, even better, $1,240. As long as those numbers hold, then I will buy the argument that we are experiencing a corrective phase in a bull market. If they don’t then I need to re-evaluate.

There are a lot of potential emerging trends I see lurking about – not all of them pretty – that could be gold positive over the next year or so.

It may be that the quantitative-easing, low-rate chickens finally start coming home to roost in the broader economy. Certainly, public opinion towards such central bank antics is changing.

We are going to get some inflation next year – certainly in the pound, but probably in the US dollar as well, not to mention the euro. That will be gold-positive.

Meanwhile, interest rates look like they have finally made their low – and thus the bond market its high. I’m not sure we are quite ready for bond market Armageddon, but upward pressure on rates will put a squeeze on things that will push some towards gold.

The rising tide of anti-politics is not going to disappear in the event of a Clinton win. This is a secular trend. It is also gold-positive.

We still don’t know what form Brexit will take, nor do we know what its impact is going to be on both Britain and, perhaps more significantly from a global perspective, on the EU.

And, perhaps most of all, the unsolvable problem of government debt and excess spending remains. I don’t see Clinton confronting that, unless the bond market forces her too. But the gold bugs’ wet dream of mass financial devaluation brought on by debt default – with gold revalued upwards to balance the balance sheet of the USA – will still be there.

The presidential cycle in gold

Finally a bit of fun: I looked back at gold’s performance during the first year of a new presidency. The omens are good.

2009 (Barack Obama) was a bonanza year, so was 2001 (George Bush). 1993 (Bill Clinton) was also a good year for gold, even though it was in the midst of a bear market.

1989 (George Bush Snr) saw gold end the year up, although it had a rotten first six months. 1981 (Ronald Reagan) was a stinker. 1977 (Jimmy Carter) was a bonanza year and 1973 (Nixon/Ford) was a belter too.

So Ronald Reagan aside, the omens are pretty good.

I recognise that a Clinton election is gold negative in the short-term, but it does not necessarily mean game over for this particular bull market.

  • Jeepers

    I am really confused by the logic here and what is happening in the market. Trump good for gold ?. Interest rate increases good for gold ? Currently sitting on large minus% with gold miners after your article and after years of holding bullion, I am still waiting for the “break through”. Not impressed.

  • Michael

    I’m not sure if Trump will be good for gold. I think it could go either way – definitely going to be interesting to follow in the next year.

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