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LAWRIE WILLIAMS: Gold may be waiting on U.S. midterms

The gold price, after its recent uptick, seems to be consolidating in a US$1,220-$1,230 range, perhaps held in check by a stronger U.S. dollar index - although maybe even more likely by machinations on the COMEX paper gold futures market.  Every time upwards pressure moves the price to the $1,230 mark it appears to be smartly brought back down a few pegs!  Movements in and out of the big SPDR Gold Shares (GLD) gold ETF have been non-existent the past few days, suggesting  too that the institutional market may be biding its time, waiting for a break-out one way or the other before committing more funds, or withdrawing gold, out of the world’s biggest gold ETF.

With the U.S. midterm elections coming up in a few weeks’ time and with some uncertainty showing up in the polls, gold may well find itself in a hiatus period until after election date (November 6th).  There’s an interesting article published by the BBC in the UK which looks in some graphical detail at the various factors which have tended to move the electorate under past Presidencies and the latest corresponding figures (See:  US mid-terms: Can we tell if Democrats will win?)  Looking at the figures and charts, currently they would on average suggest good Democratic party gains, although whether enough to gain a majority in the House of Representatives, which the Republicans currently control by 241 seats to 194, let alone in the Senate, is not so certain.  President Donald Trump (who is a hugely contentious figure in U.S. politics) has confounded the polls before and could well do so again.  His supporters are fanatical in their partisanship – but then so are his opponents . 

We think that perhaps the best pointer to the eventual result may lie in the numbers of political retirements ahead of the midterms from each party - and far more Republicans are retiring than Democrats.  The Democrats have also been far more successful in raising funds for advertising campaigns supporting their candidates than the Republicans. 

As the BBC article notes on the political retirements: “Several key committee chairs and Speaker of the House Paul Ryan have already joined what's become a modern record for retirements from a majority party - a telling sign that they think Republicans may not be a majority much longer.  Several incumbents - on the left and right - also were forcibly retired, as they lost primary races to grass-roots challengers. That could be another indication of an anti-incumbent mood in the electorate that, because there are more Republicans running for re-election than Democrats, could help fuel a Washington power shift.”

As noted above, President Trump is a contentious figure, even within his own party, and we suspect that the record number of Republican legislators standing down could be as much a sign of their dissatisfaction with the incumbent President and his policies as a normal retirement pattern.  Out of the political mainstream they no longer have to support his proposals – or comment positively on his numerous off-the-cuff tweets.  If this sense of dissatisfaction filters down to the grassroots there could well be a very big Democratic Party resurgence.

So all in all we would not be at all surprised if the Democratic Party overturns what is a pretty decent Republican majority in the House, but perhaps the GOP will retain its slender majority in the Senate.  If the Democrats overturn the Republican majority in both houses then the currently hugely partisan state of U.S. politics could lead to any, or all, of President Trump’s policy proposals being mitigated or ended altogether.  But what a wounded President Trump might do in such circumstances, while retaining executive and Commander-in-Chief powers, could be very worrying for both the U.S., and the world as a whole.

While President Trump, and his utterances, are not to everyone’s taste he has been presiding over a growing U.S. economy and falling unemployment – at least as far as perhaps tweaked official statistics tell us.  However the country’s trade deficit has been growing, while some are increasingly worried about the prospective economic implications of the trade wars the President has unleashed.

Should the Democrats prevail in the midterms then that would likely throw the U.S. into a political impasse and could severely knock confidence in the U.S. dollar which has been riding high of late.  A falling dollar would likely mean a rising gold price so political change and uncertainty in the U.S. could well be positive for gold despite the Republicans being, in theory, perhaps more precious metals-friendly than the Democrats.

President Trump and his policies seem to have been good for Wall Street and even many of those who were on the political right, but seemingly opposed to the idea of The Donald becoming President, now, perhaps grudgingly, are prepared to accept that what he has been doing has been positive for the economy.  But the worry for the Republican Party is not necessarily that those of this opinion will vote Democrat – they probably won’t – but they may abstain from voting altogether thus allowing Democrat victories by default.

So the big money, which can swing the gold price either way, may well be holding off for the time being until they are sure which way the political wind is blowing.  But the nearer to the polling date we get, if the polls are looking decisive one way or the other, the more likely we are to see gold breaking out up or down.  At the moment virtually all the polls are predicting Democrat gains, although Republicans still look to be comfortably ahead in the Senate.  The House is a different picture altogether and we look likely to see significant Democrat gains, although whether enough to achieve a majority is still in the balance.  The recent Kavanaugh hearings could have a negative impact on the Democrat vote as there is a general feeling that opposition to the judge’s appointment was purely politically motivated.  That has consolidated Republican support and perhaps weakened likely Democrat turnout.

19 Oct 2018 | Categories: Gold

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