The Election and Its Aftermath

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Excerpted from the October 28 edition of Notes From the Rabbit Hole (NFTRH 210)

We are wrapping up October with markets far and wide in the midst of corrections of varying degrees.

The US stock market is following some old clichés in that it
apparently hates the uncertainty of the upcoming presidential election
and well, it is the spooky month of October after all.  The market has done everything it was supposed to do this October and the correction is not yet indicated to be over.

NFTRH’s main area of interest is gold for all the reasons brought
forward to date.  But gold and its wild and slightly touched little
brother, silver – along with their precious distant cousins platinum and
palladium – remain mired in strong corrections of the formerly over
bought reactions out of September’s QE hype fest.  There is no evidence
as yet that these corrections are ready to end.

On November 6 we in the US will either stay with the devil we know or
elect the devil we don’t (and with a history of flip flops a mile long,
I for one do not know the guy in the least – and he was governor of my
state).  The broad US market may be operating on uncertainty and the
precious metals market may be operating under the constraints of a
still-Twisting Federal Reserve and its resultant flattening of the yield
curve.  Gold follows the yield curve, no ifs ands or buts and is
apparently shackled to and perhaps through the election.

Courtesy of Ned Davis Research

The graph above shows the average Dow performance (over the previous
14 cycles) in all election years, when the incumbent is due to win and
when the incumbent is due to lose.  The red box highlights the timeframe
of our current – post QE announcement – corrective phase.

Interestingly, today’s Dow is mimicking the average election year to near perfection!  I am going to assume that the market has no clue yet who it thinks is going to win.

When it figures this out we might expect a hard decline or a vigorous
rise as it seeks to get in line with either the “incumbent party wins”
or “incumbent party loses” scenarios on the cycle graph above.

As for gold, it is the same old tired story.  I would guess that the
Fed watched it and other assets run for a while into what it knew was an
imminent QE operation.  Conveniently, large commercial hedgers knew
enough to systematically build up their short positions into last week’s
FOMC announcement, which offered no new inflationary operations and
reaffirmed the yield curve dampening Operation Twist.

While the Dow may be held captive by the average election year cycle
gold is held captive by something else altogether.  When the yield curve
(shaded area) is rising increasing stress and inflationary pressure
(pressure to compromise the currency) is indicated to be building within
the system.  When it is declining, prudent policy is indicated to have
everything under control.

The problem here is illustrated by the FOMC’s own words:

“The Committee also will continue through the end of the year its
program to extend the average maturity of its holdings of Treasury
[i.e. Operation Twist]

It is not a free market telling us that systemic pressures are
contained.  It is a non-governmental monetary authority with the power
to buy and sell debt-based ‘assets’ in service to painting desired
images and outcomes.  I am going to leave it for other publications to
theorize about how well clued in the commercial traders were to this
operation.  All we have to know is that the operation is in force until
it no longer is.

To summarize, there is little doubt that the financial markets are
being held captive to the election process while awaiting clarity and
gold is being held captive to deliberately engineered mechanics within
the yield curve.  Don’t fight it.  Gold needed a correction anyway.  The
Fed’s supply of short-term debt instruments to sell is finite and gold
is going to get where it is going soon enough; as will the stock market.