Would a second Obama term be good for gold?

According to a note from HSBC, there is a loose correlation between gold prices and Democratic control of the White House and Congress.

Author: Geoff Candy
Posted: Friday , 02 Nov 2012

GRONINGEN (MINEWEB) -

According to a note from HSBC out earlier this week there is a loose correlation between Democratic control of the White House and Congress and higher bullion prices.

While at pains to point out that this line of inquiry shouldn't be taken too far or relied on at all heavily because gold prices are influenced by far more than the red or white nature of the White House, a look at gold's performance in light of who is in charge does show some interesting trends.

Plotting the gold's price performance since the free float of the yellow metal in 1971 against the periods when one or other party controlled both the House and the Senate HSBC found that there is a loose correlation between Democratic control of Congress and gold prices.

"The heaviest Democratic majorities in 1975-1979 coincide with a powerful and prolonged rally in gold prices from below USD200/oz to more than USD800/oz. In the early 1980s, Democratic majorities were reduced and gold prices eased. Gold declined, however, from 1983 to January 1985, a period when the Democrat majority increased. Gold also moved higher from January 1985 to October 1987, a period when Democrats lost seats but still held a majority."

However, it adds "the gold price fell as the Democratic majority in the House rose to 100 seats from October 1987 to January 1993, to a low of USD329/oz."

When the Democrats won back the House in 2006, gold rallied sharply to a level above $1,000/ ounce by February of 2008.

Plotting the gold price against who was in charge of the White House shows, HSBC says, that while gold has rallied sharply under Republican presidents, gold prices tend to appreciate more rapidly under Democratic presidents.

"Although gold prices reached their highest in nominal terms under President Barack Obama at USD1,9210/oz in early September 2011," the bank writes, "gold reached its highest level in inflation-adjusted terms towards the end of the Carter Administration in January 1980, at over USD2,300/oz in today's dollars. At the time, the US was experiencing double-digit inflation and Carter went on to lose the election later that year."

It does point out, however, that gold reached its lowest point during Clinton's administration and, during its two peaks (under Carter and Obama) "the sitting presidents were involved in a challenging economic environment, high unemployment, and Middle East entanglements, as well as high energy and food prices. Both presidents faced perplexing and, to some extent, new economic challenges for which advisors had no easy solution: "stagflation" under Carter, and high unemployment and fiscal challenges under Obama."

A look at the correlation between the public satisfaction or dissatisfaction with the current state of the country (based on Gallup data) and the price of gold, demonstrates that the metal is, understandably, less likely to rally when the public is satisfied with the direction of the nation.

As HSBC points out, "Low satisfaction levels by the American public may reflect rising prices, military engagements, economic challenges, and other negative factors, traditionally viewed as positive for gold. This was especially the case in the past few years, when gold prices soared as public satisfaction slumped."

But, it is quick to note that prices of the metal do not always move in lockstep with satisfaction and dissatisfaction levels, "but we believe it fair to say the more satisfied the public appears to be with the direction of the nation, the less likely gold is to rally. Conversely, the more dissatisfied the public is with the direction of the country, the more likely gold is to rally."

The bank also looked at gold in relation to presidential approval ratings and noted that gold prices were weakest under Regan and Clinton, presidents who were, in their estimation, "two of the most popular presidents in recent history", while under Obama and George W. Bush, who both saw their approval ratings drop sharply from post-election highs, gold has performed well.

All in all the bank writes, "A look at the charts implies a very loose correlation...Gold may benefit from Democratic dominance because of a perception that the Democrats have a greater proclivity to run budget deficits and redistribute wealth, policies that could eventually promote inflation or hurt financial markets. Conversely, gold has tended to weaken under Republican majorities. However, gold also has rallied under Republican control of Congress, and this may be because Republican leadership is sometimes associated with a more interventionist foreign policy."

All that being said, there is little way of knowing exactly what is likely to happen post this election, there are significant macro-economic challenges facing both the US and the rest of the global economy, many of which could well support gold but, none of them is dependent on who is in power.