Gold is enduring its worst annual decline in over a decade, but the upcoming US midterm elections may be setting the stage for a narrative shift 鈥?one in which fiscal deficit and inflation concerns return to the forefront, potentially reawakening the precious metal's safe-haven appeal.
The artificial intelligence investment boom continues to draw capital toward risk assets, while rising bond yields and expectations of interest rate hikes keep pressuring this non-yielding asset. Tuesday's midterm elections are prompting the market to reassess the trajectory of fiscal deficits and monetary policy, which could offer gold some breathing room.
Gold prices have tumbled this year from a record high above $5,500, now falling below the $4,000 mark, with a cumulative year-to-date decline exceeding 8%.
If the election results produce a divided Congress 鈥?mirroring the landscape after Trump's first midterm elections 鈥?legislative progress would likely stall, and the roughly $2 trillion US fiscal deficit would be difficult to rein in effectively.
Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments, said that if the 2027 trajectory echoes that of 2019, gold's current weakness could reverse.
Congressional Gridlock Could Be a Gold Price Catalyst
Multiple polls show Democrats hold an advantage in reclaiming the House of Representatives, but the battle for the Senate majority remains uncertain. Even if Democrats control both chambers of Congress, the president retains veto power, limiting the scope for fiscal spending expansion. This would put downward pressure on Treasury yields 鈥?and yields have been one of the core factors weighing on gold prices this year.
"Political gridlock could reduce the risk that fiscal policy further pushes up real yields," Miskin said, adding this would be a "very positive development" for gold. He expects the election to bring a moderate political shift with limited policy changes.
Anthony Saglimbene, chief market strategist at Ameriprise, noted that regardless of the composition of Congress, the next Congress will face a challenging fiscal backdrop.
Gridlock not only constrains spending but also blocks politically thorny measures to cut budgets or raise revenue, making it difficult to materially improve the US fiscal position. Saglimbene expects investors worried about the US fiscal outlook to turn to safe-haven assets beyond government bonds, with gold likely to benefit.
Real Yields and the Dollar Pose a Dual Headwind
Gold's pressure this year stems from the combined assault of rising real yields and a strengthening dollar. As a non-yielding asset, gold is naturally disadvantaged in a high-yield environment, and the strong economic performance driven by the AI boom has further drawn investor attention and capital toward risk assets.
Meanwhile, rising oil prices have intensified inflation concerns, reinforcing expectations of tighter monetary policy and prompting investors to favor high-yield government bonds. This has been a defining feature of this year's market: even as geopolitical risks escalated and US fiscal problems persisted, gold failed to consistently play the safe-haven role investors had hoped for.
This dynamic has created a particular tension for gold investors: fiscal worries push yields higher, making interest-bearing assets more attractive and pressuring gold in the short term. But persistently rising yields are themselves a signal of accumulating fiscal stress 鈥?if investor confidence in the dollar's long-term outlook wavers, this would instead strengthen gold's appeal as an alternative store of value.
AI Boom Sustainability and Fed Credibility Are Key Variables
Gold's trajectory depends heavily on whether AI investment can sustain its momentum. The enormous capital demands of AI infrastructure buildout are pushing companies to race toward debt markets for financing, while the US government also needs to fund its massive deficit. These two forces combined continue to drive bond yields higher, weighing on gold performance.
Roger Aliaga-D铆az, head of global portfolio construction at Vanguard Group, said the AI capital expenditure boom is one of the strongest investment cycles in decades and is unlikely to stop abruptly. Vanguard expects economic growth next year to exceed consensus forecasts.
Under Vanguard's framework, a massive deficit does not automatically constitute a bullish factor for gold: if policymakers maintain credibility and are willing to curb inflation through rate hikes, fiscal expansion would ultimately translate into higher yields rather than a collapse in dollar confidence 鈥?remaining negative for gold. "If the Fed does its job," fiscal issues should not become a major driver of gold prices, Aliaga-D铆az said.
However, once investors begin to question the Fed's independence or its willingness to contain inflation, gold's appeal would rise substantially.
Some Investors Are Already Positioning at Lower Levels
Despite divergent outlooks, gold's fall below $4,000 has begun to attract bargain hunters.
Doug Daly, portfolio manager at CoreCommodity Management, said his portfolio remains focused on energy and Middle East developments for election-related positioning, but he has gradually shifted to a more bullish stance after gold fell below $4,000. Miskin also revealed that his managed strategies added incremental positions near $4,000, with overall positioning currently ranging from neutral to slightly overweight.
From a longer-term perspective, Kristina Hooper of Man Group identified the path toward stagflation as a key signal to watch 鈥?persistent inflation combined with slowing economic growth has historically been the macroeconomic backdrop in which gold performs most brilliantly. "The bigger story is whether we are truly entering a stagflation environment," Hooper said, noting she is closely monitoring signs of weak job growth coexisting with price pressures.
If economic growth slows, real yields decline, or concerns intensify that Washington cannot rein in fiscal imbalances, gold's old allure could quickly return. But if AI investment continues to support growth, the Fed maintains a hawkish stance, and US Treasuries continue offering attractive yields, gold may remain waiting in the shadows.
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