How will gold react to mid-term elections?

The outcome of today's US midterm elections will have a significant impact on US politics over the next two years, while it could also have implications for the economy and, in turn, stocks and the dollar, as the ease with which Donald Trump will be able to pass meaningful economic policies in the remaining two years of his first term as President is at stake. By extension, gold, which is priced in the dollar, can also be affected. It is almost safe to say that today's every other scheduled event, including incoming economic data, can be ignored as far as the dollar is concerned.

Republicans set to lose control of House of Representatives

My US colleague Matt Weller, who is more informed about American politics than I can ever be, has noted in his report HERE that the Democrats are highly likely to regain control of the House of Representatives – with an 88% probability, according to polling experts at FiveThirtyEight.com – while the Senate is likely (82% probability) to remain under Republican control. If the polls are correct, then Republicans will no longer control both houses, making another round of tax cuts and passing through other economic policies more difficult to achieve, which could slow down growth and prompt the Federal Reserve to be more conservative about future rate rises.

Democrats victory could boost gold

So, the reaction of gold to the outcome of the US midterm elections could be significant because of the potential for a sharp dollar move. Based on the above reasonings, gold could fall if Republicans, seen as more being more business-friendly, were to maintain control of both the lower and upper houses. However, as noted, the Democrats are likely to regain control of the House of Representatives, which means some of Trump's key policies could face fierce opposition in his remaining two years of his first term at the White House. In this potential outcome, we could see both the dollar and possibly stocks sell-off sharply, boosting the appeal of the dollar-denominated and safe-haven precious metal.

But is not that simple

One must also consider the possibility of the pollsters getting it wrong, which has happened a few times in recent past. What's more, the outcome of the elections may be at least partially priced in, so when the results come in, we could see a not-so-straightforward reaction as those who pre-empted the outcome of the elections might be quick to take profit. That being said, there are those who may have waited for confirmation on the side-lines and ready to react when the results start to pour out.

Gold exhibits bullish characteristics as it tests key resistance

Some die-hard technical analyst fans would say that fundamental analysis is pointless as everything you need to know is already reflected in price. While I consider myself to be a very technically-minded analyst, experience tells me that it is not the technical patterns that move the markets in the long-term. Obviously I still believe in technical analysis – it is just knowing when to rely on it more than fundamental analysis. Right now, I don't think technical analysis matters much, ahead of such a potentially big risk event.

With that being said, gold, like most major currency pairs, continues to exhibit bullish technical signs, possibly because of the fundamental reasons mentioned above (investors pricing in victory for Republicans). The metal has made a few higher lows and a couple of higher highs too since bottoming out at $1160 in mid-August. While several resistance levels have already broken, one very important area still remains intact between $1238 and $1243. As the chart shows, this has been a pivotal area in the past. Thus, a clean break above here today, if seen, would be another bullish development. Irrespective of what happens today, the bulls will remain in control until and unless gold breaks back below the $1205-$1214 area now.