In Depth

US Politicians Sell Gold Stocks Despite Recession Fears

Huzaifa Waseem · 1 minute read

Gold slipped this year even if the global economic condition shows signs of struggle and fight against higher inflation.

The precious metal has been seen as an inflation hedge during the economic turmoil, but the current situation is completely different. Moreover, US politicians’ trading portfolios have no significant buying activity in Gold or gold-related stocks.

Why are US politicians not interested in Gold?

In the following section, we will see why gold is not moving higher during the economic uncertainty with US politicians' trading activities in Gold stocks.

Gold and Interest Rate: The historical look

A widespread popular belief that there is a strong negative correlation between gold and interest rates, but based on historical data, no such relationship exists. Over the past century, the correlation between gold and interest rate has been about 28% since 1970, which is insignificant.

Moreover, the gold price action in the 1970s revealed that a massive bull run appeared, pushing the gold price to an all-time high level in the 20th century while the interest rates were higher. The treasury bill bottomed at 3.5% then, while the interest rate quadrupled to 16%. At the same time, the Gold price was seen to move from $50 an ounce to an unthinkable $850 an ounce.

The price of Gold is not a function of interest rates. Rather it runs from the function of supply and demand in the long run. The increase in supply could cause the gold price to plummet while demand is ultimately stronger due to its rare presence in nature.

The rising interest rate could be a bullish factor for gold as it is bearish for the stock market. As the current market scenario is different, investors seek clues from US politicians’ trading portfolios.

Are there Politicians currently positioned in the Gold Market?

Republican Senate of Alabama, Tommy Tuberville, recently sold Barrick Gold Corp Stock (NYSE: GOLD) at $19.40 price on 22 June, where the trading size was between 50K-100K. Since then, the price has already moved down by 18.66%.

However, he was seen to add a buy order on 14 July, with a trading size of 1K to 15K. The buying price is not available yet, but the spot price on that day was 15.28.

Another US politician, Don Beyer (Democrat / House / Virginia), recently sold 150 iShares Gold Trust ETF shares on 28 February 2022 at 36.31. Chuck Fleischmann (Republican/ House/Tennessee) also joined the party by selling the iShares Gold Trust ETF on 15 February at 35.01. Although the exact trading volume is not available, the approximate number of shares was between 29 to 429.

Why are US Politicians not buying Gold?

The inflation is rising above the 41-year high to 9.1% yearly, which should push the gold price higher. Moreover, Wall Street sounds like the US economy is heading to a recession later this year, which should come up with immediate buying pressure on Gold. However, Gold's price decreased to a 16-month low after the news.

On the other hand, the US Dollar index reached a 20-year high, benefiting from the Fed’s aggressive rate hike. From the March 2022 FOMC, the Fed has made steeper rate hikes by 25, 50, 75, and another 75 bps.

The consecutive rate hikes are the main reason to keep the US dollar stronger than Gold. Gold does not offer any yield, which means it is negatively correlated with the US Dollar.

However, the Gold price mostly depends on supply and demand, whereas the current market sentiment is also unfavorable for bulls. Newcrest Mining Ltd (ASX: NCM) is the biggest gold miner showing disappointing performance in recent months. As a result, NCM stock tumbled 33% from its April 2022 peak with a painful 22.6% year-to-date return.

As a gold miner, Newcrest shares closely correlate with the spot gold price, where the Gold price is down from $1832 to $1758, or it is asking today.

According to a recent report from CNBC, the aggressive interest hike is the main culprit behind the situation. Gold bullion does not provide such income, making it unattractive to hold. Another way to protect wealth against higher inflation is securing yields from investment. This could come from share dividends, loan interest, bonds, or rent from assets.

When can US Politicians join Gold bulls?

Although no sufficient bullish activity is seen in Gold, it does not mean this instrument has lost its position as an inflation hedge.

A minor upside pressure was seen as soon as the US economy shrank for the second consecutive quarter, lowering the US Dollar and Treasury yields. Moreover, stepping back from further rate hikes to fight inflation could shift investors' interest from the US Dollar to Gold.

Gold Bullion rallied as much as 1.3% and reached the weekly high after the US Gross Domestic Product release for Q2, where the economy fell 0.9% while the inflation remained higher. The Fed chair Jerome Powell said there is a possibility of another 75 bps rate hike in 2022, but they will lower the rate from 2023.

In that case, investors should closely monitor the Fed’s approach to further rate hikes, where staying back from the rate hike party could shift investors' sentiment on precious metals. In the current situation, investors are taking part in high-yielding investments rather than buying gold bullions, while US politicians are not involved in any gold buying activities.

Therefore, staying away from rate hikes could provide hope to Gold investors, while the current trading portfolios from US politicians are not supportive to bulls.