Historically, gold has performed poorly after elections. Will this time be different?

The U.S. election has entered the "final stretch," and investors are turning their attention to the gold market. Historically, gold's performance after U.S. elections has often been disappointing. Will this year repeat that pattern?

On November 4th, Citigroup analysts Kenny Xunyuan Hu, Maximilian J Layton, and Viswanathrao Kintali released a report stating that gold may face pressure in the short term after the U.S. election, but the structural gold bull market remains solid, recommending that investors buy gold when prices decline.

Poor Short-Term Performance of Gold Contrasts with Stock Market Performance

Historically, the average return of gold in the short term after U.S. elections (such as 1 week or 1 month) has been negative. Citigroup noted that this presents a buying opportunity on dips.

Data shows that since the Nixon era, the average returns of gold one day, one week, and one month after elections have been 0.2%, -0.4%, and -0.4%, respectively. In the four election cycles from 2008 to 2020, these short-term average returns were even lower at -0.8%, -2.2%, and -3.1%.

Notably, in the past four election cycles, the returns of gold one week and one month after elections appeared to be negatively correlated with the performance of the U.S. stock market, meaning that when the S&P 500 index performs strongly, gold is sold off more, and vice versa.

Analysis indicates that this negative correlation can be explained by a decrease in market demand for "holding gold to hedge against uncertainty," along with a flow of funds into the stock market.

If this relationship holds, a victory for Trump, especially with a "red wave" (widely seen as favorable for the U.S. stock market) leading to corporate tax cuts and supporting the stock market, could result in tactical selling of gold, similar to the sell-off gold experienced after Trump's victory in 2016, where gold prices fell by 8.2% within a month.

In contrast, the relationship between short-term fluctuations in gold prices and U.S. Treasury yields or a strong dollar is much less clear. After the elections in 2016 and 2020, despite the opposing trends of the dollar index, gold still experienced sell-offs.

Gold's Relationship with the "Trump Trade" is Not Significant

Although market participants view gold as part of the "Trump trade," Citigroup believes the situation is not that simple. Compared to U.S. Treasury yields and the dollar, the relationship between gold and whether Trump is leading in election bets is not obvious. Over the past few months, regardless of whether Trump was leading, gold has repeatedly set new highs.

From a trade perspective, the tariffs proposed by Trump are ultimately detrimental to U.S. growth and may increase gold asset allocation and drive up gold prices. However, from a fiscal perspective, Trump may expand spending but will also collaborate with Musk to cut expenses, so the net impact of Trump 2.0 on the U.S. deficit remains unclear.

Multiple factors support gold prices, aiming for $3,000 in the next six months

Analysis indicates that the chain reaction of the U.S. election on gold appears negative, but it is still recommended to buy gold during any significant downturns, as gold prices will have greater upside potential, expected to reach $3,000 per ounce within the next six months.

Citigroup believes this is supported by the continuously deteriorating U.S. labor market and the rising demand for ETFs, while long-term themes such as the ongoing expansion of global debt levels and the demand for alternative fiat currencies in the context of de-dollarization also provide structural support for gold.

Additionally, market momentum is also positive; in the past six instances where gold's annual return exceeded 20%, five continued to rise in the following calendar year, with an average increase of 15.4%, and gold has already risen 33% this year.

Not only Citigroup, but JP Morgan also expresses a long-term bullish outlook on gold, with analysis suggesting that although the current market consensus may bring short-term pullback risks, the fundamentals for gold remain strong in the medium term. Regardless of the outcome of the U.S. election, the three supporting factors—Federal Reserve rate cut cycle, global central bank gold purchasing demand, and overall currency depreciation trades—will continue to exist