US Presidential Election leads to rise of precious metals

Precious metals rose in the week of the US Presidential Elections with gold and silver recouping the loss of the preceding week. Gold and silver have also broken through the short-term downward trend line of the correction. However, this movement is not backed by all of the major fundamental factors. Furthermore, the strong move up on Tuesday was based on two conflicting arguments. Therefore, we would remain cautious, i.e. staying long but having tight stops in place.

On Tuesday, while the poll stations were still open and votes not counted, gold and silver triggered a rally in line with other risky assets. The US stock market rose on speculation that Mitt Romney would become the next US president. Gold and silver moved also higher after the US stock market was closed and votes were counted. As exit polls and first voting results showed a lead of Mr. Romney this move was consistent so far. However, these predictions were still in line with opinion polls, which showed that incumbent president Obama would win a second term. But after all major US TV-stations called Obama winning a second term in the White House, gold and silver advanced further. Now the argument of the gold bulls was that Fed Chairman Bernanke would stay in office at least until the end of his term and that quantitative easing would not end anytime soon. This behavior is not consistent. If a continuation of quantitative easing would be a necessary condition for precious metals to move higher, the initial trigger for the rise on Tuesday was not justified.  

In early computer trading, the US stock index futures turned negative again while the poll stations were still open at the US East coast. But after it was clear that president Obama won a second term, also stock index futures turned positive again. However, after Wall Street opened, the US stock market plunged. This behavior demonstrated again that stock markets are by no means always efficient and that all available information is already priced in. The projections based on opinion polls and scientific methods showed all that the incumbent president would also be the next one. Therefore, a victory of Mr. Obama should have been discounted. But it appears that donations of many Wall Street companies eclipsed rational behavior and led to a wishful thinking behavior in many trading rooms.

At the US stock market, the fear is now that the US is heading towards the fiscal cliff. However, also a Romney win would not have changed the situation, which should also have been discounted. The polls also showed that the majorities in the Congress would not change; the House would be dominated by the republicans and the Senate by the democrats. And the election results brought no surprise and confirmed the projection of the polls. This also should have been priced in.

Wall Street appears to react like Skinner rats, Obama is negative for stocks. This was also obvious last Friday. Positive economic data triggered a recovery of the US stock market. The statement of House majority leader Boehner had no negative impact. However, when president Obama spoke, the US stock market pared gains. Both underlined their positions but also affirmed the willingness to find a compromise.

From our point of view, the risk for not finding a compromise is neither president Obama nor Mr. Boehner, who showed willingness to compromise already in the summer last year. The problem is the fundamental opposition by the Tea Party fraction within the republicans. But Wall Street does not understand the political behavior in Washington. A compromise is probably not found quickly, but more likely towards the last hour. Agreeing to a compromise quickly is regarded often as a sign of weakness and not negotiating hard enough. This leads to the risk, that the US stock market might be driven more by fears of falling off the fiscal cliff then by the economic data, which shows more and more signs of economic improvement.

If Wall Street will be driven more by political fears instead of sober rational analysis then it remains doubtful whether precious metals would move higher. A weak US stock market and a firmer US dollar are usually negative for precious metals. And even more quantitative easing would not be able to prevent the negative consequences if the automatic tax hikes and spending cuts kick in at January 1, 2013 in the USA. Therefore, we would keep tight stops for long positions in precious metals. However, in the case that a compromise to avoid the fiscal cliff should be found quickly, then precious metals are likely to rally further strongly.