Though the price of gold climbing by over 16% during the first quarter of the year, the price of the precious metal has dipped in the past during presidential election years and is likely to bottom out in 2016.
Gold has been viewed as a safe haven against volatile markets and during inflationary periods, but it typically declines when interest rates start to rise and in election years, making the investment riskier in these current environments. Investors were drawn to the gold market when various stocks reached new lows earlier this year.
The correlation between gold and financial assets such as stocks and bonds is nearly non-existent, said Robert Johnson, president of the American College of Financial Services in Bryn Mawr, Pa. During the period from 1978 through 2013, the correlation of gold to stocks was 0.02 and to bonds was 0.04.
In the same time frame, gold returned an average of 7.1%, “substantially less” than the S&P 500, a benchmark index, which generated returns of 10.7%.
“Gold didn't perform very well in environments in which many investors expect it to perform well -- when interest rates are rising,” he said.
In periods when interest rates start to rise, gold’s return declined to a mere 4.9%, which is less than stocks -- whose performance also declined, but only to 6.7%.
“This contradicts the conventional wisdom that gold serves as a good inflation hedge,” Johnson said.
Gold also fares poorly during presidential election years and had already dipped by 4% since its high in March and could decline as much as 15% to 20% from last week’s price of $1,223 an ounce, said Dean Heskin, CEO of Swiss America, a Phoenix-based gold trading company.
During the past 50 years, gold’s performance has followed this path and prices will start adjusting downward, he said.
“I have no reason to believe that whether it's a Republican or a Democrat, political drama notwithstanding, that this time should be any different,” Heskin said. “It's likely the start of a correction, regardless of expected continued bullishness by many people."
Despite positive economic indicators such as employment data and “cautious optimism from the Fed, gold is about to bottom as it always has in an election year,” Heskin said. “Concerns about global growth, the plunge in crude, weakness in China and questionable monetary policy around the world have also played a role in this year’s historic gold rush.”
The declines in gold prices could continue, said Stephen Kalayjian, chief market technician for KnowVera, a New York-based software trading company.
“I still think there is a chance for one more pullback in gold,” he said. “I am expecting gold to pull in if the U.S. equity markets push higher.”
The price of gold should reflect the future buying power of a currency such as the U.S. dollar, said C.J. Brott, founder of Capital Ideas, a registered investment adviser in Dallas and a portfolio manager with Covestor, the online investing marketplace.
Voters make their choices based on confidence in a candidate’s ability to solve various issues and problems, he said. The remaining candidates are often playing on voters’ extreme anxiety, he said.
“The current $1,230 price may reflect that extreme voter angst since an ounce of gold in 2008 cost about $800,” Brott said.
The current price of gold is inflated, because of the impending election and should fall back to lower levels.
“If it had kept pace with the Consumer Price Index, an economic indicator which measures the price of consumer goods and services, it would cost $881 today and not $1,230,” he said.
Gold is one asset that responds well to uncertainty, and “there is plenty of that in the current election,” said David Twibell, president of Englewood, Colorado-based Custom Portfolio Group.
“I think there are some even larger catalysts for gold in 2016, though, including the continued global push towards negative yields and the likelihood of further currency devaluation,” he said. “Absent a significantly stronger U.S. dollar, I expect gold to do fairly well this year.”
When Prices Rebound
Gold prices have tended to remain flat during presidential election years and declines pending the results, said Heskin. Depending on other economic factors, gold can recover in the subsequent years.
The prices could rebound if the U.S. equity markets reach a top and start to decline in the months ahead, Kalayjian said. “I expect gold to be used as a safe haven and push back up,” he said.
Investors should be cautious before adding gold to their portfolio or divesting it, because it does not produce quick returns, said Heskin.
“Gold is highly liquid and a powerful diversification tool as well as an ideal hedge against coming inflation and/or currency devaluation,” he said. “Gold thrives in environments of uncertainty, unrest and stock volatility. If markets crash, the dollar tumbles or inflation soars, then investors will typically run to gold as a safe haven and prices will rise.”