🟡How Will Gold React to the US Elections?

Gold has enjoyed one of its best years on record, with prices surging since the start of the year. This rally can be attributed to a shift in central bank sentiment, heightened geopolitical tensions, particularly in the Middle East, and the highly contested US presidential election. But will the election outcome significantly impact gold prices? What is the current fundamental outlook for gold, and can we expect to see new all-time highs this year?

Best Year Since the Early 1980s 

Although the year is not yet over, gold has already gained over 33%, its strongest performance since the late 1970s. There are no immediate signs of a significant reversal in these gains. Across the broader commodities market, few assets have outperformed gold. While commodities like cocoa and orange juice have seen even more impressive gains, gold and silver—which are closely correlated—have also delivered substantial returns. Notably, gold is consistently nearing new all-time highs, unlike many other commodities.

Source: Bloomberg Finance LP

Central Banks, Geopolitical Tensions, and Elections 

Unlike bonds or fixed-deposit accounts, gold does not pay interest. Therefore, high interest rates are typically unfavorable for gold investments. However, concerns over inflation and geopolitical instability have driven investors to seek safe-haven assets like gold. Moreover, since June, most central banks have reversed course and initiated interest rate cuts. The US Federal Reserve, while slightly behind the curve, has implemented significant rate cuts and is expected to lower rates further this year. Fed decisions have a profound impact on the dollar and, consequently, gold. Lower interest rates generally benefit precious metals investments.

Tensions in the Middle East have persisted since last October and escalated this year, with Israel expanding its military operations and Iran retaliating with missile attacks. This heightened uncertainty has contributed to rising gold prices. While geopolitical tensions often have a transitory impact on assets, their effect on gold tends to be more enduring. As a result of rate cuts and market uncertainty, investors have returned to gold ETFs, marking the first inflow since 2022.

Source: Bloomberg Finance LP, XTB

The Impact of the US Presidential Election 

Historically, there is limited evidence of a direct correlation between US presidential elections and gold prices. However, the election outcome will undoubtedly influence US geopolitical and macroeconomic policies, potentially causing significant volatility in the dollar and other assets. In the past two election cycles (2016 and 2020), gold prices tended to decline in the month following the election, possibly due to profit-taking. A similar pattern could emerge this year, regardless of the winner.

How gold performed during previous elections? Source: Bloomberg Finance LP, XTB

Gold long positions are extremely high. Source: Bloomberg Finance LP, XTB

The policy proposals of the two candidates could have varying impacts on gold:

• A Harris victory and a Democratic-controlled Congress: This scenario could weaken the dollar due to increased government spending. A larger debt burden might lead to credit rating downgrades, which would be supportive of gold prices in both the short and long term.
• A Harris victory with a divided Congress: This would limit the scope for increased spending, potentially strengthening the dollar but negatively impacting gold in the short term. However, long-term prospects for gold remain positive due to the challenges of significantly reducing the US debt.
• A Trump victory and a Republican-controlled Congress: A Trump victory could strengthen the dollar due to protectionist policies but may also weaken the US fiscal position due to tax cuts. This could lead to credit rating downgrades and support gold prices over the medium to long term. Additionally, Trump's foreign policy could create geopolitical uncertainties, benefiting gold.
• A Trump victory with a divided Congress: This scenario might limit the impact of Trump's policies and could result in muted gold price movements.

The Outlook for Gold 

After such a strong rally, a correction in gold prices seems increasingly likely. However, barring a significant shift in the Fed's policy stance, this correction is unlikely to be substantial. The long-term outlook for gold remains compelling. When compared to assets like oil, the S&P 500, and copper, gold is still relatively undervalued. Moreover, continued central bank demand, investor interest in physical gold, and geopolitical risks support the case for further price gains. With gold typically rallying in the 12-24 months following the initial rate cut in a cycle, the metal's upward trajectory may not be over.

Gold during previous cycles of lowering interest rates by the Fed. Source: Bloomberg Finance LP, XTB

Michal Stajniak, CFA

Commodity Market Analyst XTB