Trading Gold During the US Presidential Election
History has shown that the price of gold tends to become increasingly volatile in the lead-up to the US Presidential election. Some studies suggest that the price of gold has a direct correlation to party affiliation, however, research shows that these observations are contradictory. This is because many factors can come into play to influence the price of an asset, such as seasonality, economic cycles and, well, a global pandemic.
Still, a change in leadership in the US usually brings with it a refreshed fiscal policy, which is likely to have an impact on the financial markets as a whole. Past data has shown a common trend suggesting that financial markets perform differently for each year of the presidency. According to the Political Business Cycle Theory, the period prior to an election is always characterised by a fluctuation of economic activity. This theory argues that political candidates intervene with the economy in order to improve their prospects of the incumbent government being re-elected. The result? An artificial economic boom to sway voters in their direction.
How did Gold Perform during Past Elections?
So, is it profitable to trade gold and precious metals in the lead-up to the US election? From the past eleven presidential election cycles since 1970 (when gold started to be freely traded), the price of gold increased during seven of them. In eight cases, the price of gold also experienced the worst performance during the post-election year.
There are exceptions to this rule, such as in 2016, when the price of gold fell sharply from over $1,300 to around $1,100. During Donald Trump’s first year as President, the price of gold actually increased by $200 and ended 2017 at $1350 per ounce.
Another point to note is that out of the eleven presidential terms, six were Republican and five were Democratic. On average, gold performed better under Democratic presidencies, gaining around 88.36% throughout the cycle and skyrocketing by 392.50% under Jimmy Carter’s government (1977-1980). Overall, there does not seem to be a correlation between prices of gold and political affiliation, although gold did behave better whenever a newcomer became President.
Let’s take a look at how gold performed during past recent elections:
Gold reached an all-time high during Obama’s first term in the Whitehouse, only to experience four of its worst years in his second term.
The price of gold tripled over eight years under Bush’s presidency, rising from below $300 to over $900 per ounce.
Gold pulled back when Bill Clinton was first elected, but rallied during his first year in power. Later, during his second term, gold slipped to all time-lows of $250.
Gold Price in 2020: Is now a good time to trade gold?
The fluctuation of gold prices cannot be blamed on the upcoming Presidential election alone, but we need to look at broader factors that have influenced market movements. Psychology plays a significant role in determining the asset’s price, too. During times of turmoil, people often place their faith in the yellow metal when trust in government falters. During times of stability, the price of gold lowers.
The asset’s price in 2020 is proof in itself. Gold gained strength due to the coronavirus pandemic, which caused people to invest in the metal as a safe haven. Later on in the year, a new all-time high was reached in August 2020, when gold was valued at $2074.88 per ounce!
Gold Versus the Dollar
Gold has traditionally been viewed as a profitable asset for long-term investors, but the surge in volatility has also made it an attractive asset for traders. Usually, the price of gold tends to fall when the price of the US Dollar increases in comparison with other currencies. When this happens, gold becomes more expensive in other parts of the world, resulting in buyers and lower demand. The opposite is also true: if the US Dollar weakens, gold gains strength.
Periods of increased market volatility often create more opportunities for traders to profit, especially when trading with leverage. Leverage allows traders to open larger positions with lower deposits, creating the chance to increase your profits by up to x500.
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