- Investment demand for gold has already increased by 21% year-on-year, with assets in gold-backed ETFs hitting $235.4 billion in the third quarter compared to $141.1 billion at the end of 2019, according to a recent World Gold Council report.
- Gold demand is likely to increase as US election uncertainty continues to weigh on riskier assets, experts say.
- Other global risks that could support gold include a resurgence of COVID-19 cases in Europe, Brexit, and rising geopolitical tensions between the US and China.
- Three gold experts, who have studied the hard asset for years, shared how gold could be the real winner regardless of the election outcome.
- Visit Business Insider's homepage for more stories.
From stocks to bonds to alternative assets, Wall Street has given specific recommendations about how to trade the winners and losers in different election scenarios. But three experts have shared how gold could end up as the real winner regardless of the election outcome.
Ryan Giannotto, director of research at the $1.5 billion ETF provider GraniteShares, studied the response of gold to every election that took place in the past 50 years. He finds that while gold had a muted response to the immediate outcome of the 12 past presidential elections, it started to generate double-digit returns after the 18-month mark.
"There are a lot of mythologies surrounding gold, that it is a great way to strike it rich and that there's a lot of euphoric sentimental value regarding it," he said in an interview. "But when you look at the data, it's actually a much more interesting story. Though the response to the first year was relatively muted, over time, the gains were surprisingly large."
His research on gold's gains, which is illustrated in the chart below, shows that 24 months after a GOP presidential victory, gold rallied on average 30.7% versus 20.8% following a Democratic win.
Under a Republican administration, the hard asset gained 37.2% after 36 months, and 34.1% after 48 months. Under a Democratic administration, gold rallied 56.0% after three years, and 98.1% after four years.
"It takes time for policies to filter through not only political chambers of power but then also to alter economic performance and then expectations," Giannotto said of the reason why it takes gold at least 18 months to generate double-digit returns after an election outcome.
"First, the politics have to filter through the political chambers. Then, the economic policies have to take time to take place and then finally expectations get revised, and it's that final stage that really bears import for gold especially with inflation," he added. "Inflation expectations changes are notoriously slow to happen. We refer to this as the sticky price and sticky wage phenomenon."
While investors stand to benefit from gold in either outcome, it is in a contested election where gold is expected to shine, according to Giannotto.
"The possibility of contested or unclear results would be very conducive to rising gold prices simply because we have never had in the US an openly contested election where the results are indeterminate," he said.
The $1.3 billion GraniteShares Gold Trust ETF (BAR) has returned 23.03% year-to-date, according to Morningstar data.
A good entry point ahead of the election
Kevin Rich, global gold market advisor for the $497.9 million Perth Mint Physical Gold ETF (AAAU), agrees that investors can make a bullish case for gold regardless of the election outcome because the dollar is under pressure either way.
"Whether the Democrats or the Republicans take the White House, further fiscal stimulus is coming. And that's going to be bullish for gold," Rich said in an interview.
He explained: "The more we spend, the higher the deficits go, and the more pressure it puts on the dollar. A weak dollar usually means stronger gold prices."
Although gold has sold off about 11% since it broke above $2,000 in August, Rich believes that the correction signals "the quiet before the storm" and represents "a good entry point" for investors sitting on the sidelines.
"What we've seen is new investor demand for gold was pretty hectic all year long and it's actually calmed down the last couple of weeks," he said. "And part of that is people positioning themselves ahead of the election so this is kind of the quiet before the storm."
He continued: "I think it's a good entry point if you want to rebalance your allocation ahead of the election because the sell-off prices make it a good entry point."
The Perth Mint Physical Gold ETF, which was acquired by Goldman Sachs Asset Management in September, has returned 22.9% year-to-date, according to Morningstar data.
A global asset with a dual nature
While gold bugs are waiting to see if gold could potentially break above $2000 again post-election, Juan Carlos Artigas, head of research at the World Gold Council, believes that US elections will not have a huge impact on gold's performance.
"Part of the reason is that gold is a global market. While the US is indeed an important component of the overall global piece, there are important macroeconomic drivers that influence gold on a global scale," Artigas said in an interview.
However, he still expects to see rising demand for gold for the rest of the year.
The investment demand for gold has already increased by 21% year-on-year, with assets in gold-backed ETFs hitting $235.4 billion in the third quarter compared to the $141.1 billion at the end of 2019, according to the World Gold Council's Q3 gold demand trends report.
"The investment demand is driven by a combination of increased risk and uncertainty. So when there's higher risk, there tends to be a more flight to quality," he said, adding that ultra-low interest rates have prompted investors to replace some of their cash or fixed-income exposure with gold.
As for uncertainty, surging COVID cases in Europe, Brexit, the US election, and US-China trade tensions have all played a part in driving up the investment demand for gold in this environment, Artigas explained.
Nevertheless, whether gold performance has anything to do with the election or not, investors should understand that gold is not only a source of returns, liquidity, and diversification but also a physical asset that has long-term value, according to Artigas.
"This quarter is a good representation of how typically investment demand tends to offset weakness in consumer demand during periods of risk," he said. "However, that dual dynamic really gives gold not only its uniqueness, but it shapes up the benefits that investors can get from holding gold strategically."
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