Buying Gold: How to Protect Against and Profit From Volatility on Election Day

It’s Election Day, and hopefully, we’ll all be able to breathe a sigh of relief once its over.

A gold bar along with some coins made of precious metals.

Source: Shutterstock

We’re living through one of the most polarized periods in modern U.S. politics, and it will be nice to step away from the 24-hour election coverage.

However, I’m sure some readers are saying, “But what if … ?”

You can fill in the blank with whatever you like.

What if we don’t know who wins right away? What if vote counting is halted tonight? What if it goes on till New Year’s? What if President Trump holds the White House but the Democrats flip the Senate … or vice versa?

These things are out of our control — assuming you’ve already voted — so all we can do now is wait and see.

That said, many investors want to know where to put their money if Donald Trump wins … or if Joe Biden wins.

And the financial media certainly hasn’t let them down, dedicating billions of gigabytes to stories about which sectors and companies will thrive — or sink — under each candidate.

But I’m not here to tease out whether one administration will be good for this sector or that … or if another will put an end to the Wall Street party.

I’d rather take a look at how to profit regardless of who wins this election.

Here’s my strategy …

Volatile Markets Send Investors Looking for Gold

On Saturday, I told you that the stock market volatility we’ve been seeing recently may be a taste of things to come over the next few weeks … especially if some of those “What Ifs?” don’t get answered right away.

In fact, I said that “volatility is about to enter a new bull market.” At least, that’s my expectation.

In that Smart Money issue, I also showed you eight basic hedging tactics:

  • Selling stocks to raise cash
  • Buying put options
  • Selling call options
  • Selling short individual stocks or exchange-traded funds (ETFs)
  • Buying “inverse” ETFs that bet against a specific stock market index or sector
  • Buying gold
  • Buying “volatility” ETFs or exchange-traded notes (ETNs) that bet on rising volatility
  • Buying long-short ETFs or funds

And in that issue, we talked about Hedge Tactic No. 7: Buying “volatility” ETFs or ETNs. But regular readers probably noticed a familiar strategy on that list — one we’ve discussed before.

Hedge Tactic No. 8: Buying gold.

The financial media have dedicated a lot of words to which sectors will thrive under the different candidates, but I think we should be talking more about this far more reliable form of “presidential profiteering.” As the market data analysts at Refinitiv write:

There is no doubt that we are likely to see increased volatility in stock markets in the run up to the election day and investors seeking traditional safe havens such as gold, particularly if the race between the two candidates gets very close and there is a growing risk of a contested outcome.

It seems simple enough. Gold prices rise as volatility increases. The election will increase volatility. Therefore, the election itself will push gold higher.

But the next question is always: “How will the outcome of the election affect gold prices?”

That’s a sensible question.

But here’s the thing: Gold doesn’t care who wins the election.

Again, from Refinitiv:

A close look at historical gold price movements in the aftermath of previous U.S. presidential elections suggests little evidence of a clear relationship between the gold price and the election outcome based on party affiliation.

Instead, Saida Litosh, manager of precious metals analysis at Refinitiv, says “it is the underlying macroeconomic conditions present at a specific time that seem to play a greater role in driving gold prices, particularly in the short-to-medium term.”

The volatility created by the election is one reason gold is pushing higher. But the election is far from the only thing driving gold higher.

After all, the COVID-19 pandemic pushed investors into safe-haven assets like gold months ago, and with infection rates rising, the pandemic is surely still raising the appeal of the yellow metal.

If you only look at these short-term influences, you just won’t get the full picture.

And you certainly won’t see how gold could hit $3,000 per ounce before its current bull market ends…

Low Interest Rates Drive Gold Higher … and They Are Above Politics

To be sure, renewed coronavirus concerns and the election could trigger the gold-buying impulse. But while these headline grabbers are certainly contributing to the gold-buying frenzy, the back-page story is the one that could propel the gold price to $2,000 and beyond.

In late 2008, Federal Reserve Chairman Ben Bernanke introduced a controversial new term to the world: “quantitative easing” (QE).

In essence, the Fed would conjure dollars from thin air and then use those dollars to buy Treasurys and mortgage-backed securities in the open market – both to support their prices and to provide liquidity to the credit markets.

Turning back to the gold market, Bernanke’s QE program was simply a new twist on an old tactic called “money printing.” As such, this program undermined the dollar’s value to some extent and boosted the value – and appeal – of gold.

The Federal Reserve and the other major central banks around the world have implemented very large and aggressive QE programs to combat the effects of the COVID-19 pandemic. As the world’s major central banks ramped up their QE operations, they exerted downward pressure on interest rates. That’s one of the goals of QE, after all.

Central banks buy bonds in the open market to provide liquidity to the marketplace and to push interest rates lower.

Well, artificially low interest rates have historically driven investors into the gold market.

In fact, you could say that gold loves low interest rates … and it loves negative rates even more!

Today, more than one quarter of the world’s bonds are “paying” a negative yield. These “deadbeat” bonds literally take a little bit of your money away from you every day because the interest they’re paying doesn’t offset the rising inflation rate.

Warren Buffett once declared, “Gold will never produce anything.” But gold is one of the few assets that traditionally does offset inflation over time.

And these low interest rates aren’t a product of politics. We’ve all seen the White House criticize Fed Chair Jerome Powell’s actions, but he has remained independent.

If negative real interest rates are driving the market higher, it doesn’t matter who the president is … because the president doesn’t set interest rates.

If you want to capitalize on election volatility and guard against it at the same timegold is a solid bet.

I recently put together a special report all about playing the bullish trend in gold. You can find out how to get it right here.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.

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