This post was written with contributions from Howard Wen. Howard is a Senior Gold Research Strategist on the ETF and Mutual Fund Research Team.
Politics has held sway over the market since the 2016 US presidential election, as investors react to everything from the unexpected Trump presidential win to rising tensions with North Korea to the passage of tax cut legislation and US tariffs on steel and aluminum. But what role does the party in power on Capitol Hill play in determining the price of gold?
With the US midterm elections approaching, we decided to try to answer that question. Conventional wisdom suggests that stock returns are stronger when Republicans, historically associated with a pro-business and anti-tax platform, are in power and weaker when Democrats, traditionally associated with business regulation and wealth redistribution, are in control. Does this same type of conventional wisdom hold true for gold—is its price performance weaker under Republican administrations but stronger under Democratic ones?
The current political landscape
Currently, Republicans hold the trifecta of leadership on Capitol Hill with control of the House of Representatives, the Senate and the presidency. This leadership could change as a result of the 2018 midterm elections.
Republicans control the majority in the House of Representatives, but popular polls show a tilt toward the Democrats at the upcoming midterm elections with a 58% favorability over a 43% favorability for the Republicans.1 Meanwhile, there are 35 US Senate seats to be contested in 2018. Republicans have the majority in the Senate, but a two-seat gain by the Democrats would see the majority flip into the latter's favor. Democrats currently have the edge based on recent polls with a 46% favorability over a 40% favorability for the Republicans.2
Based on these projections, there is a real possibility that the Democrats could take control of both the Senate and the House, leaving the Republicans with control solely of the presidency.
Gold's historical performance under different party control
To determine how gold has performed under different political party control, we analyzed gold's return from August of 1971, when gold was un-pegged from the US dollar to May 2018.
This first chart below indicates that a House controlled by Democrats appears to be friendlier to gold over the S&P 500® Index than a Republican-controlled House. But keep in mind—this data is skewed by oil price shocks in the 1970s and early 80s.
The same findings—that Democratic control appears to be friendlier to gold over the S&P 500 Index than Republican control—seem to be the case for the Senate as well, illustrated below.
The data shows gold has historically performed well when a single party controls the House, Senate and the presidency. Gridlock—when neither the Democrats nor the Republicans have a single party control over the House, Senate and presidency—historically has still been positive for gold performance, but at only half the performance rate of the S&P 500.
No matter which party controls the government, gold has historically had a relatively low to negative correlation to the S&P 500.
Political party power and gold: more than meets the eye
But is the connection between gold's performance and the party in power that simple? A 2014 study by Princeton found the US economy has grown faster when the president is a Democrat.3 However, this edge is not attributed to systematically more expansionary monetary or fiscal policy. Instead, the study finds this performance is attributed to more benign oil shocks, superior total factor productivity performance, a more favorable international environment, and possibly more optimistic consumer expectations about the near term.
We believe these same arguments can be made for the Senate and the House. While the Democrat's edge at the presidency benefited from more benign oil shocks, the same cannot be said for the Senate and the House. The surge in oil prices in 1974-1975 from $4 a barrel to $10 a barrel, and in 1979-1980 from $15 a barrel to $40 a barrel, happened when the Democrats controlled the Senate and the House. These periods coincided with gold hitting its all-time high (at the time) of $193 an ounce in 1974 and $850 an ounce in 1980.4
Consequently, we believe it is not the political party that drives gold's performance but rather underlying factors such as economic growth, consumer confidence, inflation expectations and oil prices.
Influencing the price of gold
Instead of focusing on the political party in power to determine gold's potential path forward, we believe investors should take into consideration how a potential Democratic or Republican victory in the midterm elections would impact the economy. For instance, might a Democratic- or Republican-controlled Senate and House lead to more or less economic uncertainty? In our view, gold would more likely react to investors' perception of a political party's potential approach to governance rather than which party is in office—or which party wins the midterm elections.
Politics is also just one factor that influences gold performance. After all, the market for gold is global. Global changes in expectations about growth, uncertainty and opportunity cost can have a significant impact on gold.
Regardless of the outcome of the midterm elections, gold can play numerous roles in a portfolio, with its potential for increasing portfolio diversification to mitigating potential tail risk and enhancing risk-adjusted returns. Investors seeking to add gold exposure to a portfolio can consider our new gold ETF, the SPDR® Gold MiniShares (GLDM). GLDM is our lowest cost SPDR gold product, with a total expense ratio of just 18 basis points. Investors looking for access to gold with relatively deep liquidity and optionality can consider our original gold ETF, the SPDR Gold Shares (GLD®). Please visit spdrs.com for more information.
12018 Midterm Elections Forecast, thecrosstab.com, as of 5/30/2018.
2"Are Republicans/Democrats Winning The Race For Congress?" fivethirtyeight.com, as of 5/29/2018.
3"Presidents and the U.S. Economy: An Econometric Exploration," by Alan S. Blinder and Mark W. Watson, as of July 2014, nber.org.
4Performing the same analysis from January 1981 to May 2018 to remove the effect of the oil crisis results in better performance for gold under a Republican Senate, and better performance under a Democrat House and total government control but with much smaller differences in average returns.