How Gold Responds to a Contested Election

November 8th, 2016 by

With the presidential election finally upon us, investors have been clamoring for trades that will prove especially effective following the results of today’s vote. Yet, with negative news and controversy swirling around the Clinton camp, the presidential race has tightened considerably. This has thrown expectations for a loop.

Aside from how the markets—particularly for gold—will react to a Trump or Clinton victory, what can we expect in the increasingly plausible situation of an unclear election outcome?

Déjà Vu

The last time that a U.S. presidential election was contested is still probably fresh in the minds of most people over the age of 25: the Florida recount in the 2000 election between eventual winner George W. Bush and former vice president Al Gore.

many-questionsUncertainty is always a driver of safe-haven demand from investors. According to Joseph Innace, the metals content director at S&P Global Platts, “Generally, the more politically uncertain the climate, the more of a safe-haven asset gold becomes and gold prices tend to rise.” A simple review of polling this election season bears out this general trend: Each time Trump gains in the polls, Wall St slumps and volatility rises.

You would think that the specter of a vote recount would simply heap fuel onto the fire of uncertainty. However, if history is any precedent, a contested election result may not lead to an immediate rush into gold. As the 2000 recount dragged on before Gore ceded the election to Bush, gold prices only edged up about 4%. While the current political and economic atmosphere is different now, 16 years later, the electoral fiasco in 2000 provides some caution to gold bulls. In the event of a recount, expect gold prices to jump somewhat—but perhaps not as much as one would normally expect.

Post-Election Trades

ballot-1294935_640When searching for lucrative trading strategies in the wake of the election, keep in mind that the contest for president appears to be a close one. Swing states like Florida, Ohio, Pennsylvania, and North Carolina will likely tip the final outcome. If Trump loses and the margin of victory is narrow, we can expect the candidate to exercise his legal rights to contest the outcome.

No matter what, however, the Congress will remain bitterly divided after the election. This sort of upheaval provides a baseline scenario to start from regardless of which candidate prevails.

According to renowned insider James Rickards, one of the best post-election options is to “short the S&P [500] and buy gold.” Rickards reasons that a Clinton victory is already priced-in, meaning there’s little risk if she indeed wins—but an enormous amount of upside if Trump pulls off an upset. Stocks could fall 10% to 15% while gold prices rise $100 per ounce or more. Rickards executed a similar trade ahead of the surprising Brexit referendum.

With gold offering safe-haven appeal already, we could see the “hot money” flow out of gold and gold funds in the immediate aftermath of the election. Beyond providing a safe place to park one’s money amid turmoil, this could present a great buying opportunity for bargain-hunters and value investors.

In other trades, it’s generally accepted wisdom that a Trump presidency would hurt the dollar, while the greenback is expected to strengthen with Clinton in the White House.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.