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Presidential Election Cycle

The presidential term lasts four years. The first year of a presidency is a post-election year, the second is called a midterm election year, the third is a pre-election year, and the last year is an election year. It turns out that financial markets performed differently in each of these years. Data generally confirms the prediction of the political business cycle: equities generally prosper in the second half of a president’s term, while they often have a relatively weak first half. However, the gold market is a different kettle of fish.

Presidential Cycle and Gold

For gold, the election cycle is quite specific. In general, the post-election year is the worst, as the yellow metal gains only 2.27 percent, on average. On the contrary, the second year of the presidency is the best for the price of gold, as the shiny metal rallies 12.82 percent, on average. The pre-election (11.21 percent) and election (8.99 percent) years are between, but gold’s highest performance is evidently closer to the midterm year, as one can see in the chart below.

Chart 1: Average annual return of gold (London P.M. Fix) in presidential election years between 1973 and 2016.

gold presidential election cycle

And what about silver and gold stocks? Let’s have a look below where we present the average annual returns of gold, silver, the general stock market (S&P) and gold equity indices (XAU and HUI).

Chart 2: Average annual return of S&P (1948-2015, green line), gold (London P.M. Fix, 1972-2015, yellow line), silver (London Fix, 1972-2015, blue line), XAU Index (1984-2015, purple line) and HUI Index (1997-2015, red line) in presidential election cycles.

Average annual return of S&P, gold, silver, XAU Index and HUI Index in presidential election cycles

As can be seen, there is hardly any clear pattern. Gold performs the strongest in the midterm election year and the weakest in the post-election year while for silver, the pre-election year is the best year, and the election year is the worst. Both metals prefer the second half of a president’s term, but it is only because of the unique rally in silver prices in 1979. The general stock market behaves as predicted by the theory of the political business cycle and performs better during the second half of the election cycle. But gold stocks prefer the first half of the term and hate the election year. However, the XAU index loves the post-election year, while the HUI index is the strongest during the midterm year. Although there is a certain pattern, it seems that in the long-term, the yellow metal is affected by the U.S. economy and monetary policy rather than the U.S. presidential elections.

We encourage you to learn more about the gold market – not only about its performance during presidential election cycle, but also how to successfully use gold as an investment and how to profitably trade gold. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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