This post was written with contributions from the SPDR Gold Strategy Team: George Milling-Stanley, Chief Gold Strategist, and Diego Andrade, Senior Gold Strategist.
While the phrase “this time is different” is famous for being a flawed viewpoint in the investment community, 2020 has certainly put that rule to the test. The impact of the COVID-19 pandemic on the global market and economy has led to a record level of monetary and fiscal stimulus, as well as a persistent cloud of uncertainty. Against this backdrop, gold has shined, with investment demand surging1 and its price reaching a new all-time high2 this year.
Heading into year-end, the divisive US general election has cast a further shadow of ambiguity for investors in 2020 that may help further gold’s momentum. While US politics and the pending election represent an important factor that may impact global markets and volatility in the near term, broader global economic and market implications from future US policy decisions likely remain more impactful over the medium and longer term. That said, the outcome of the 2020 election remains front and center for investors, and it is important to understand how gold has behaved in the past, under different political party leadership, and how this may potentially further support gold heading into 2021.
Political Party & Performance: A Historical View
Although no two elections are the same, evaluating gold’s average performance during various political party leaderships may help guide and calibrate which factors are important for investors to consider as they look ahead. Generally, gold has posted positive returns when either political party — Republican or Democrat — sits in the White House. But the yellow metal has historically performed slightly better when a Democrat has been in the Oval Office compared with a Republican — 11.2% vs. 10.2%, respectively. While gold appears to fare well regardless of party politics when it comes to the presidency, this does not appear to be the case for the US Congress (see Figure 1).
On average, a Democratically controlled Congress appears to historically have been more supportive of gold (20.9%) than one controlled by Republicans (3.9%). Those years in which the legislative branch had split-control, representing gridlock, appear to be the worst-performing scenario for gold historically (3.5%). This dramatic disparity between gold’s performance during periods of split political party control in Congress, however, may reflect overarching investor expectations about pending US fiscal policy.
Republicans are commonly thought of as being pro-business and fiscally conservative, while Democrats are historically associated with higher fiscal spending and wealth redistribution. Regardless of whether this is true or not in practice, these “rule of thumb” heuristics by the market may help to explain why gold has outperformed by more than fivefold when expectations were geared toward higher spending by Congress.
A standpoint of expected higher fiscal spending may help explain gold’s performance during periods when the US budget deficit as a percent of US Gross Domestic Product (GDP) grows. As highlighted in a previous blog,3 rising budget deficits driven by higher fiscal spending may hinder economic growth over the medium term, and, in turn, spark a weaker US dollar outlook. This environment may prove to be a potential positive catalyst for gold given its negative historical correlation to the US dollar.4 In response to the current pandemic, the US budget deficit is currently 15% of US GDP (see Figure 2). The prospect of a widening deficit on the heels of additional rounds of fiscal stimulus that are required to combat the economic impact of the pandemic may continue to keep gold in favor.
Uncertainty is the Only Certainty for 2020 and Beyond
The 2020 US presidential race remains mired in uncertainty. Meanwhile, the US is currently in an economic recession – an environment that has historically benefited gold’s performance.5 There have been only two US presidential elections occurring during an economic recession – 1980 and 1992. During both of these elections, the challenging party beat the incumbent (Republicans in 1980 and Democrats in 1992).
As Figure 3 shows, in the calendar years following a US presidential election, gold has performed better – on average – after a victory from the challenging political party (7.9%) compared with a victory by the incumbent party (6.5%). The sentiment of uncertainty due to a new administration may be part of the reason for gold’s performance immediately following a change in leadership. Conversely, when the incumbent party retained control of the White House, gold tended to underperform against US equities and Treasurys.
Additionally, the prospect of this election landing in a contested status or the results lingering as uncertain after election day remains high. This uncertainty may fuel the potential for heightened volatility across US and global markets. As highlighted in our blog, Indecision 2020,6 gold performed well during the last contested election in 2000 – posting a 1.7% gain during the vote recount between November and December 2000.7
As illustrated below, on average, gold has served as a better potential hedge against equity, interest rate, and currency volatility. Gold’s weekly return during elevated implied volatility was positive, on average, and outperformed US equities, US bonds, and the US dollar. In a year like 2020, when uncertainty is the only certainty, gold remains a robust diversifier and is potentially well-suited to help investors navigate an unclear landscape.
There are a myriad of underlying factors and ways that US politics can potentially influence gold. But gold remains a global market with diverse sources of demand, and it is unlikely that global investors are exclusively moved by US events. With the potential for further market uncertainty heading into 2021, gold may offer several potential benefits for investors regardless of the presidential election outcome.
Bloomberg Barclays US Aggregate Bond Index The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Bloomberg Barclays US Treasury Index The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Chicago Board Options Exchange Volatility Index (VIX) The VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index.
Gross Domestic Product or GDP The monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
ICE BofA MOVE Index This is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.
Implied Volatility A way of estimating volatility of a security’s price based on a number of predictive variables. Implied volatility rises when the market is falling when investors believe that the asset’s price will decline over time, and it falls when the market is rising when investors believe that the security’s price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets.
J.P. Morgan Global FX Volatility Index JPMorgan Global Volatility index tracks the implied volatility of FX options of a set basket of global currencies.
S&P 500 Total Return Index The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
US Dollar Index The US Dollar Index (DXY) measures the performance of the US Dollar against a basket of currencies: the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Canadian dollar (CAD), the Swiss Franc (CHF) and the Swedish krona (SEK).
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