From the October 01, 2012 issue of Futures Magazine • Subscribe!

Trading and the election

The November U.S. presidential election is upon us. As always in these elections, many markets will be affected by the outcome. But this time around, there are two underlying markets that should receive serious attention. They are gold and the Swiss franc (USD/CHF). They are correlated inversely, as they both are impacted by the same sentiment concerns (see Gold watch). Fear of growing U.S. debt and the potential increase in inflation have been key drivers for bullish gold moves. Concomitantly, when hope for further quantitative easing or stimulus declines, gold has sold off. The USD/CHF valuation has waxed and waned in response to the bullish or bearish gold waves. 

The case for paying close attention and trading gold and the USD/CHF for their response to the 2012 U.S. election outcome goes deeper than a cursory look at their charts. Embedded in the price action of gold has been its long-term correlation with U.S. debt levels. Gold prices and U.S. debt limits have had a high degree of correlation between the years 1996-2011, a correlation coefficient of 0.97, to be exact. In layman’s terms, as the U.S. debt limits have increased, the price of gold has increased proportionally. Relatively, over 15 years we have seen the debt limit increase 176.25% and the value of gold increase 263.18% (see “Debt is golden for gold”). 

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