US Midterm Election may Weigh on Gold but Impact shoud be Short-lived

Commodities moved a tad higher in European session as weakness in USD continued to provide supports. Currently trading at 1365, the benchmark contract for gold soared for a third consecutive day. Others in the precious metal complex remained firm with silver rising to 25.055, a new 30-year high, and palladium surging for a 8th straight day to 657.3. While trading below October's high of 1730, platinum gained for a third day to as high as 1722.5. Oil prices also rose with the front-month contract for WTI crude oil price climbing to 82.2.

It's probably one the most important weeks in the US, as well as financial markets. Apart from the FOMC meeting, the midterm election will be held on November 2. Democrats currently control both houses of Congress. However, current polls indicate Republicans are likely to take over the House and that Democrats will maintain control of the Senate by a slim margin. How will this political mix affect financial markets?

Research shows that midterm election has stronger correlation between elections and equities but history told us that USD did rise shortly after elections when Congress changed control: from Democrats to Replicans in 1980, 1984 and 1994. While there may be problems on passing legislations, parties seemed to place significant efforts in managing deficits and boosting economic growth. If history repeats this time, we may see temporary strength in the dollar. Hence, gold (and other commodities) may decline as a result. Yet, as we mentioned, the impact should not affect the long-term uptrend for gold. As economists on the street expect, US economy will remain sluggish for an extended period, thus, increasing the appeal for gold and a safe haven and a store of value.

Concerning economic data, US' ISM manufacturing index probably dipped to 54 in October from 54.4 a month ago. Earlier in the day, China's PMI expanded to 54.7 in October from 53.8 a month ago. This is the fastest growth pace in 6 months and signaled the country's economy can sustain through the government's tightening measures. In the UK, manufacturing PMI unexpectedly rose to 54.9 in October from 53.4 in September. The market has anticipated a drop to 53. The decline in pound, especially against the euro, has helped boost exports. Together with the strong-than-expected GDP growth in 3Q10, the BOE will very likely leave monetary policies unchanged on Thursday.