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: Hillary Clinton and Donald Trump. The latter is also an outsider (like Bernie Sanders) and an anti-establishment candidate, without a specific economic program. This is why his candidacy makes it difficult for investors to assess the financial implications of the next administration.
What we know is that Trump is a right-wing populist who wants to impose huge import tariffs, which would reduce the benefits of trade and make foreign goods more expensive, and limit immigration, which is an important source of economic vitality. Surely, he also proposes a pro-growth tax plan with significant tax cuts, however, it would increase the budget deficit, as Trump does not say anything how to reduce spending to finance tax cuts (he would leave Social Security and Medicare, two of the costliest parts of the federal budget, untouched). However, it is too early to assess his program. We can only say that it would mean greater economic nationalism, which should increase uncertainty among investors and support the price of silver.
The uncertainty regarding the U.S. election should be negative for the U.S. dollar and positive for silver. However, as the elections approach, the uncertainty should ease (as the parties will choose candidates who will hopefully present more elaborated economic programs), unless Trump gets the nomination and has favorable polls – in such a scenario, nobody would really know what to expect and silver should gain on such uncertainty as a safe-haven. All in all, it appears that the relationship between Trump and gold is the following: if Trump wins the election, silver should also shine, at least at the very beginning when the investors would not yet know what kind of policies they should expect from the new president.
In other words, higher odds for Trump winning the election should be supportive for the silver prices, since markets likes stability and predictability, while Trump is a dark horse with unknown economic views and anti-systemic beliefs, so nobody knows what to expect of him. However, investors should remember that although the price of silver tends to follow the price of gold, it is not as good a safe-haven asset as gold. Actually, 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.
Moreover, the impact of the 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 depend also on the monetary policy and the situation in gold and the 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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