Presidential Election Cycle
Bill Clinton, George W. Bush and George Washington are on a sinking ship. As the boat sinks, George Washington heroically shouts: “Save the women!” George W. Bush hysterically hollers: “Screw the women!” Bill Clinton's asks excitedly: “Do we have time?”
One of theories of the business cycle is the presidential election cycle, or political business cycle, which says that politicians try to juice up the economy during election years to improve their chances of re-election. They use fiscal or monetary policy to stimulate the economy just before an election to increase their odds of remaining in office. But after the election is over and the next election is far away, politicians reverse the course and restrict the fiscal and monetary stimuli. Thus, major elections produce economic booms and busts, as politicians try to create an artificial boom before every election and take advantage of voters’ short-sightedness
Indeed, the data generally confirms the prediction of the presidential election cycle: the financial and precious metals markets performed differently in each of these years. In particular, equities generally prosper in the second half of a president’s term, while they often have a relatively weak first half.
And what about gold? Well, for the yellow metal, the post-election year is the worst, as it gains only 2.31 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 12.89 percent, on average. The pre-election (12.02 percent) and election (12.76 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: The average annual return of gold (London P.M. Fix) in presidential election years between 1973 and 2019.
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.
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.