US Elections Continue To Drive Gold

Written by James Harte

Narrowing polls ahead of the US election tomorrow have caused significant volatility in financial markets over the last week as a “Clinton Victory” came under significant threat. Gold, which is traditionally viewed as a safe haven, saw a surge in demand as investors began to question their confidence in a Clinton win.

From its midsummer highs, following a surge in demand following the UK’s surprise Brexit vote, Gold has since retreated and traded all the way back down to pre-Brexit levels. The sell-off was fuelled by Clinton’s growing lead in the elections polls following her performance in the debates. However, Clinton has been caught in something of a media storm over the last week as the FBI announced that they were re-opening an investigation into her use of private email servers, which bolstered support for Trump and caused a spike in investor uncertainty.

With the FBI having now confirmed that they stand by their original judgement of pursuing no charges against the Democratic candidate, risk appetite has recovered into the final day of the election. The sensitivity with which Gold has tracked the developments of the US elections has highlighted the usefulness of the instrument for traders and also raises questions about the price action traders can expect in response to the outcome of the election.

Trump Win = Market Volatility

A Trump win is viewed with great uncertainty by investors who are wary of the impact of the protectionist/isolationist economic policies he has proposed as well as the geopolitical tensions likely to be caused by a Trump win. As such, a Trump win is likely to fuel a period of risk off trading which should see Gold supported initially.  With a period of risk-off trading and volatile markets likely to follow a Trump election, Fed rate hike expectations are likely to be significantly scaled back, lending further support to Gold.

The medium-term outlook for Gold will then be dependent on what Trump actually does and to what extent he follows through with his campaign promises.  Trump has been much more aggressive in support of a fiscal policy which should translate into more hawkish monetary policy over time again putting pressure on risk assets.

A Clinton win should be more market neutral, presenting little change from the current administration and such should support a return by markets to trading on core fundamentals rather than election uncertainties.

Lack Of Concession Could Prolong Uncertainty

One scenario however which could prolong the uncertainty around the elections is if Trump fails to concede as the votes come in in favour of Clinton. Typically, the losing candidate in an election race will concede based on the incoming results, which usually happens early morning.  However, Trump has promised not to concede and instead to keep the country “in suspense.”

Without a formal concession, it might be a little trickier for markets to call the election due to the narrowing of Clinton’s lead following the reopening of the FBI’s investigation.  In this instance, investor uncertainty is likely to keep markets gridlocked as investors await the confirmed outcome of the election.

The 2000 election is an example of when the loser didn’t formally concede until December.  The length of time taken for the loser to concede was the result of an extremely close national vote and a very close vote in the swing state of Florida. If enough states show a clear win for Clinton, then a lack of concession by Trump might not matter.

For now Gold is sitting just below the resistance trend line of a long term bearish channel having found support off the low of the short-term bullish channel that has framed price action this year. A Trump win would likely see Gold break back above the year to date high at 1375 with a retest of the broken support level at 1520/30 the key technical resistance.