Democrats take control of the Congress and move Trump out of the White House. Sounds unbelievable? So what is probable and what is not? We invite you to read our today’s article about the upcoming US Mid-Term Elections and find out what are the likely consequences for the gold market.
Elections are approaching the US again. Two years after Donald Trump
was elected as POTUS, American voters go to the polls again on November
6th for the mid-term elections. They will elect all 435 members of the
House of Representatives and 35 of 100 Senators (as well as 36 state
governors and many other local officers).
Who is likely to win and how will it affect the gold market? Well, the expectations are that the Republicans keep the Senate but lose control of the House of Representatives. Indeed, Democrats are ahead in generic congressional polls, which indicate overall sentiment towards the parties across the country. According to the RealClear Politics, 49.4 percent of voters are in favor of them, while only 42.1 percent of them support Republicans.
But what about the seats? The FiveThirtyEight
estimates the probability that Democrats win control of the lower house
at 83.8 percent, but only at 17.4 percent to win the upper house (wait,
why is that: don’t Republicans control the Senate by just a single
vote? It’s true, but the majority of seats up for election this year are
held by Democrats currently, so there are a lot more opportunities for
them to lose than to win seats).
Should we trust these polls? Well, the presidential election (not to mention Brexit referendum) showed that skepticism is recommended.
The US economy is doing well, so the support for Republicans may hold
up. On the other hand, uniquely many of Republican representatives are
retiring – and it is harder to defend open seats.
Historically, the party of incumbent president usually lose ground during mid-term elections. Indeed, there are few patterns in American politics as regular as the loss of House seats by the President’s party in midterm elections.
In the last two centuries, there were only three exceptions: 1934
(during Roosevelt’s presidency), 1998 (during Clinton’s presidency) and
2002 (during George W. Bush’s presidency). And the losses are often
dramatic: for example, in 2010, Obama lost 63 seats in House.
OK, but why does the President’s party tend to lose seats during the midterms? The reason is simple: the opposition is energized, while the supporters of the President and his party are not as engaged.
Why should they be, they have already won in the previous elections!
Moreover, some of them may be alienated by the President’s unfulfilled
promises (Mr. Trump, where are the wall and the replacement of
Obamacare?) or actions undertaken (the funny thing is that tariffs hit
Republican states the most). Who like who, but Trump can alienate
people. He has very high disapproval ratings, so we expect a strong mobilization of Democrats (thus, even the Senate is at risk).
what does it all mean for the gold market? First, Trump as President
and Democrats controlling the House means the political stalemate.
Although it is not necessarily something negative, Trump will be
unlikely to pass any significant law after the 2018 midterms, with the
exception of large infrastructure package which could get bipartisan
support. It means that investors could scale back their expectations of
more business-friendly regulatory or tax changes. The stock market could
then reverse a part of previous Trump rally, which could support the gold prices. As one can see in the chart below, in the aftermath of 2016 elections, risky assets gained, while the price of gold plunged.
Chart 1: Gold prices from November 2016 to October 2018.
facing gridlock in domestic issues, Trump could turn stronger into
foreign policy. Trade disputes may intensify and general uncertainty is
likely to rise. The positive effect of geopolitical events on gold is often overstated, but that change will not harm gold, at least.
Democratic-controlled House could try to move Trump out of the White
House. They could even impeach him, as they only need a majority of the
House. But then the case goes to the Senate and a two-thirds majority is
needed to remove President from the office. Democrats will not gain so
many seats, so they are not likely to start the process (unless they
convince several Republican senators), as it would be impractical and
could mobilize President’s base during presidential elections. So,
although the impeachment case may not go anywhere far, there will be
some noise, which could rattle financial markets. Some investors would then turn to gold as a safe-haven asset.
effect could be temporary, it’s true, but the post-midterm era should
be a better time for gold. Democrats will probably take over the control
of the House. It means that pro-business agenda could be blocked. Trump
will focus on foreign policy and concerns about impeachment emerge. All of these factors should favor safe assets, such as gold. With tightening of monetary policy and no fresh fiscal stimulus, the US economy could slow down, while inflation
may increase (especially that tariffs block the imports of cheap
products from abroad). Hence, although the fundamental outlook for gold
remains rather bearish
in the near to medium term, it improves in the long run, but not
necessarily because of the elections (economics likely overshadow
politics). So, we might say that neither blue nor red wave, but gold wave is coming!
If you enjoyed the above analysis and would you like to know more
about the macroeconomic outlook and the gold market, we invite you to
read the October Market Overview
report. If you’re interested in the detailed price analysis and price
projections with targets, we invite you to sign up for our Gold & Silver trading Alerts.
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Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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