Clinton and Silver

2016 is an U.S. presidential election year. This is an important fact for the silver market, because the elections tend to influence financial markets and where the price of silver is headed. There are several theories and stylized facts about such an impact. For example, according to the theory of the presidential election cycle, U.S. stock markets are weakest in the year following the election of a new U.S. president, and after the first year, the market improves until the cycle begins again with the next presidential election. Since silver is believed to be negatively correlated with the stock market, its price should move in opposite direction than the price of stocks during the presidential cycle (the silver market should be strongest in the year following the election of a new U.S. president, and after the first year, the silver market should weaken until the cycle begins again). However, the price of silver is not negatively correlated with the stock market in the medium term (taking 250 trading days into account) and, thus, not affected by the presidential election cycles as the standard theory assumes (actually, it is positively correlated with the stock market in such a time frame). Instead, history shows that silver tends to follow gold in its election year journey, often dropping just prior to the elections and rising in the days following the U.S. election.

The problem with historical statistics is that while there is a tendency for the technical patterns to repeat or to be self-similar to a great extent, this doesn’t have to be the case with patterns based on specific presidential candidates, as the differences between them can be much bigger than the differences between technical patterns. It seems that this year the candidates are very different than those who were candidates in the past. The current elections are unique, because we have two front-runner candidates for the White House who have very polarized opinions: Donald Trump and Hillary Clinton. How the election of the latter would affect the price of silver? Well, it is not easy to say.

In the long run, Clinton’s economic program is likely to lower economic growth. As a reminder, she wants to increase taxes on the wealthy and on investment (which are already too high), raise the minimum wage (which is already too high), bring back the labor unions, expand Social Security and ObamaCare, and increase public investment in infrastructure, education and clean energy. The public investment in infrastructure could support GDP growth, however, we believe that her economic policy would generally deteriorate the U.S. economy. Although we agree with her that there are many risks associated with the financial sector, we are not sure whether stricter regulations would solve the problem. The U.S. economy is over-regulated due to the escalating regulation under Obama. Clinton will probably continue Obama’s stance, which would be negative for the economy and, thus, positive for the gold prices. The price of silver tends to follow the price of gold, but investors should remember that industrial demand (positively correlated with GDP growth) is much more important for silver than for gold. Investors should also remember that silver prices tend to follow gold prices with some lag, just to catch up with them later, often over-reacting compared with gold’s behavior. Currently, the gold to silver ratio is relatively high, which could imply that the price of silver will accelerate in the foreseeable future.

On the other hand, Clinton is the establishment candidate. She was the First Lady, the Secretary of State, the Senator from New York, she gives speeches to large Wall Street banks. Compared to Trump, Clinton ensures stability and predictability, everyone know more or less what to expect of her. Therefore, in the medium- and short-term, the price of silver should be negatively correlated with Clinton’s odds for winning the nomination and, later, the presidency, as her election would be considered a safer bet. In other words, Trump’s favorable polls should increase the safe-haven demand for silver, while Clinton’s favorable polls should decrease silver’s safe-haven appeal.

However, the impact of presidential elections on the price of silver is not exact science, since there are many political factors that have to be taken into consideration, such as the political control of both houses of the Congress, the co-operation between the president and the Congress, the fiscal policy, etc. Therefore, long-term investors should not make their decisions based only on the basis of the presidential elections, but always look at the fundamentals, which also depend on the monetary policy and the situation in gold and base metals markets, and technicals which can help determine the optimal entry and exit moments. This caveat is particularly relevant in the case of silver, since silver prices are almost twice as volatile as gold prices, therefore, silver is a much riskier investment with a higher beta (investing in silver increases potential profits, but also potential losses compared with gold).

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

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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