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Both Parties Won. And Gold?

Commentaries & Views

US mid-term elections are behind us. Surprisingly, both parties won! How is it possible? Let’s read our article and find out! We will also explain what the election results imply for the world and the gold market.

Democrats Win

The elections were very interesting. We provide you with the key takeaways, focusing on the possible implications for the precious metals. First, Democrats took control of the House, the first time in eight years. Their victory will make it harder for Trump to push his agenda forward. Given that investors liked his pro-business stance, the change should upset the Wall Street. It implies weaker greenback, while stronger gold.

Republicans Win, Too

Second, Republicans kept control of the Senate. Actually, they increased their majority in the upper chamber of Congress. It means that although Democrats improved their position, their triumph is below the (inflated) expectations. You see, this is what usually happens in the mid-term elections: voters punish the incumbent party. So, the retaking control of the House is not a surprise. This is why we have not seen a significant move in the gold market.

But there was no blue wave, even though the turnout was historically high, which was supportive for Democrats (typically, older and whiter people vote in mid-term elections, but that time Democrats managed to mobilize their base). Moreover, given money, momentum and the retirement of several Republican representatives, the results are not really impressive for Democrats.

If Both Parties Win, Who Loses Then?

Hence, we could say that both parties won (or both lost). The biggest loser is the American politics and society. The country is highly polarized and split into two camps. It implies that politicians will be less capable of finding common ground. More divisions and less cooperation is a great recipe for lack of any reforms and drifting towards the crisis. Just think about the high level of public debt. If investors faith in US fiscal capacity diminishes, gold may shine.

And What About Gold?

The election results were broadly as expected. Therefore, as one can see in the chart below, the price of gold was slightly moved, despite some fluctuations during the day.

Chart 1: Gold prices from November 5 to November 7, 2018.

But what about the future? Well, the initial move in the US dollar may be telling. As the chart below shows, the greenback weakened against the euro (although it rebounded later).

Chart 2: EUR/USD exchange rate from November 5 to November 7, 2018.

It may reflect the fact that Democrats will have the ability to investigate the President. More investigations into Trump’s scandals or even the impeachment vote could rattle the markets and increase the safe-haven demand for gold.

And, as we have already mentioned, Democrats will block Trump’s agenda. Investors could forget now about a second round of tax cuts, as the President will be unable to make any major legislative changes without the approval of the Democrats (but there may be some room to work together on certain issues, in particular on a spending package to improve infrastructure).

Although it’s too early to fully assess the impact of the mid-term elections, we see more upside than downside risks for gold. However, with a split U.S. Congress, there will be a political gridlock. It means that economic factors will become even more important drivers of the gold prices. It’s actually not good news for gold, given the hot economy and the Fed’s tightening of the monetary policy. By the way, today we will see the fresh monetary policy statement. Powell is expected to keep the interest rates unchanged – but who knows? Stay tuned!

Thank you.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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