The much-awaited US midterm elections have resulted in the Democrats barely gaining control of the House of Representatives, while the Republicans maintain control in the Senate and even increase their lead.
The financial markets have cheered the results immediately, but the longer term economic impact of a divided Congress remains to be seen.
Dollar Weakness Strengthens Gold
Following the announcement of the results, gold prices began to firm up as the Dollar index declined more than half a percent. As expectations for a substantial fiscal policy boost waned with a divided Congress, it quickly reflected in terms of a weakening dollar.
Gold demand gets a boost as the US dollar weakens because it makes the yellow metal cheaper for global investors to hold as against other currencies. Carsten Menke, a Julius Baer analyst, said that the midterm election results turned out to be on expected lines, and the gold market is not really surprised.
Gold Rally May Continue
With Democrats barely in control of the House of Representatives, they now have the opportunity to block the government’s agenda on deregulation and further tax cuts which has made America the envy of the world. But since tax cuts have proven to be such a winner, more tax cuts could be coming still.
Chances are that by blocking such economic measures, the Democrats may be able to reduce the pace of the stock markets, the US dollar, and put some brakes on the supercharged US economy that has been created through 2018. With the tax cuts already in place, America could be at 3% GDP going forward whereas if the Republicans still controlled the house they could push through more tax cuts pushing the American economy to a consistent 4% and even 5% GDP.
But this is not going to happen for another two years when the Republicans have a chance to retake the house.
An environment of financial uncertainty and political division is something that typically encourages investors to choose gold as a safety net. As a result, the precious metal’s current rally may continue from this point on.
Kitco’s Jim Wyckoff said that gold traders have become active to buy on dips, and there is significant short covering from futures traders.
Interest Rates Still a Bigger Factor
Some analysts are of the view that the split election verdict may not impact gold much, since the yellow metal has already been rather inured to various geopolitical events this year. According to BMO’s head of metals trading, Tai Wong, the key driver for gold continues to be the US dollar.
Wong said that gold appears to be comfortable in the $1,215-$1,245 range as of now, while the market waits for the next real turn in the trading chessboard.
Market participants are keeping a close watch on the two-day Fed meeting to sense whether there may be any changes to the interest rate hike predictions already made for 2019. The Fed has said it plans for about four more hikes in 2019, and one in 2020, in the wake of a robust economy and continuing job growth.
Commerzbank Bullish on Gold
Following the midterm election results, Commerzbank has expressed hope that gold will benefit in multiple ways. With Democrats barely in control of the House of Representatives because of so many Republicans retiring (it was hard for the Republicans to defend every seat), it will presumably end the chances of a further round of tax cuts as already stated.
This effectively means that in the longer term, the Fed may need to enforce fewer interest rate hikes, resulting in a negative impact on the greenback.
The 4% GDP creating President Trump, according to Commerzbank, may shift more of his energies on foreign policy, which would only add to the atmosphere of uncertainty. Gold could potentially profit in the long term from all these factors.