Election Uncertainty: Will Gold Soar or the Dollar Dominate?
Financial markets are closely monitoring any changes in economic policies that could have an impact on the currency and gold prices as the November 5 U.S. elections draw near. Different situations involving these important assets are expected to occur if one party wins the presidential election.
An economist at ABN AMRO (AS:ABNd) Bank stated in a note that the US dollar “has a dual character meaning it has a cyclical nature, while also being the ultimate safe haven currency.”
Due to this duality, the dollar tends to appreciate during periods of rapid economic expansion, especially when growth exceeds inflation, real interest rates are rising, and the fiscal and current account balances are getting better.
However, the dollar’s status as a safe haven increases during times of severe market stress and liquidity shortages, as investors seek stability and the dollar’s value rises accordingly.
Even a partial Democratic triumph in the next election is not anticipated to have much of an effect on the US currency. According to ABN AMRO Bank, a Democratic government is expected to see a dip in inflation, but policy rates would drop even more quickly, which would lower real rates, which is usually bad for a currency.
Although there could be some downward pressure on the dollar due to a tiny deterioration in the fiscal balance, overall, the impact is expected to be minimal, meaning that the dollar will remain quite steady with only minor swings.
On the other hand, a Republican win might cause the US currency to become more volatile. Expectations of more trade restrictions, including the imposition of tariffs, which could improve the trade balance, may initially provide the dollar a lift.
The dollar would continue to be strong due to the combination of increasing inflation and interest rate hikes occurring more quickly than in other countries.
This first increase, meanwhile, is probably just transient. Longer term, the dollar may weaken as the effects of these policies become more evident on the economy.
A “Hard Trump” scenario including substantial tariffs by a Republican administration might result in one of the sharpest differences between U.S. and European monetary policy since the euro’s introduction in 1999.
In this case, the euro might lose value in relation to the dollar, which might push the EUR/USD exchange rate below parity.
The initial rise of the dollar, however, can reverse as market mood stabilizes and the detrimental effects of these measures start to affect the economy, ushering in a period of noticeable dollar decline.
Gold is a valuable metal that has historically been seen as a safe haven, particularly in difficult economic times.
But in recent years, the dynamics of the gold market have changed, especially with the emergence of gold exchange-traded funds (ETFs). This has turned gold from a traditional safe haven into a more speculative asset that is heavily influenced by investment flows, changes in the value of the US dollar, and real interest rates.
“We think the gold prices could be very modestly supported if the Democrats win because we expect a modest decline in or a neutral dollar and some lower real yields,” the statement reads. We anticipate that the price of an ounce of gold will remain around USD 2,500,” an ABN AMRO Bank economist stated.
On the other hand, a Republican triumph, especially if it results in the imposition of broad tariffs, might make things more difficult for gold.
Rising inflation and rising interest rates in the early years of such an administration might strengthen the currency and push gold prices below their 200-day moving average, possibly as low as $2,000 an ounce.
But gold is expected to recover, maybe surpassing the highs hit earlier in 2024, as real interest rates fall and the dollar’s initial strength wanes.
