by Ronan Manly, BullionStar:
This year is shaping up to be a perfect storm for political risk and uncertainty, given that in addition to the upcoming US presidential and Congress elections, we have already seen major shifts in the political landscapes of two other G7 countries, France and the United Kingdom.
While often underappreciated, elections and changes in governments in major economies like the US, UK, and France create political uncertainty that can have a significant impact on financial market stability, investor sentiment, and on macro factors such as interest rates, US dollar strength, and geopolitical risk – all of which are key influences on the gold price.
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This is because the run-up to elections leads to uncertainty about election outcomes and who will be in power, and the outcome of elections often leads to new parties and leaders assuming power who have different agendas to their predecessors. New governments and leaders assuming power with new agendas then usually implement different economic policies compared to their predecessors. This phenomenon is known as policy shift.
These economic policy shifts can be fiscal (increased government spending policies, deficit financed taxation policies), trade-related (different tariff policies and re-negotiating trade agreements), foreign policy related (changing approaches to foreign relations and geopolitical strategies) and also monetary policy related (to the extent that governments have influence on their central banks and central banks have to support the governments’ economic policies).
Pre-election, the potential for policy shifts causes market volatility, and post-election the implementation of policy shifts alters the direction of an economy, which in turn can impact market confidence and causes changes in investor behaviour.
Political uncertainty and policy shifts thus increase economic uncertainty, and can have an impact on inflationary expectations (e.g. due to concern about increased government spending and / or accelerated money printing), as well as impacting interest rates expectations and increasing currency volatility, again all of which are key influences on the international gold price.
In turn, economic uncertainty makes investors become more risk-averse, forcing them to seek out safe haven assets such as gold. And if policy shifts are expected to lead to higher inflation and weakening fiat currencies, investors will also seek out gold for its inflation hedge and store of value properties.
Additionally, in many so called ‘democracies’, political views are becoming increasingly polarised and there has been a marked rise in populism, factors which have created deepening political divisions. Just look, for example, at the US and France. Increased polarisation among electorates in turn causes distrust and suspicion of election outcomes and even refusal to accept election outcomes, with claims of election fraud and media manipulation. Again, look right now at the US and France, not to mention the disputed Venezuelan election results and civil unrest that are happening right now.
Distrust of election outcomes and refusal to accept them creates further political instability and with it social unrest, riots and even potentially civil war. All of this instability and uncertainty in turn pushes investors to seek the stability and security of safe haven assets such as gold.
Political Uncertainty in the US now off the Scale
With just over 3 months left before the 60th US presidential election takes place on 5 November, all eyes are on the US where the political uncertainty has recently gone off the scale in the wake of the Donald Trump assassination attempt in Pennsylvania on 13 July, the exit of Joe Biden from the election on 21 July, and the endorsement of his vice-president (VP) Kamila Harris as Biden’s replacement.
In the usual drawn out circus that is the US presidential race, these developments have really thrown fuel on the fire of political uncertainty and increased the polarisation among the US electorate, given the differing views within the electorate that the Republican Trump assassination was a) an inside job, b) was staged, c) had multiple shooters, and that the exit of Democrat Biden was a) voluntary, or b) a Democratic Party coup.
Since US presidential elections began in 1788-79, rarely have US presidential candidates been subject to an assassination attempt or pulled out of the race this close to the election, let alone both developments in the same presidential election race.
Throw in the fact that Harris has not even become the official Democratic presidential nominee and has not even chosen a VP candidate of her own, and the lack of predictability in this presidential election is arguably unprecedented. Not to forget that there are also some other interesting candidates in the presidential race, such as Robert F. Kennedy Jr as an independent, and Chase Oliver for the Libertarian Party, both of who will split the overall vote thus making it harder to predict the overall outcome
