U.S. Election Results: Best of All Possible Worlds for Gold

Tuesday’s election outcome - with President Obama returning to the White House, the Democrats retaining a weak majority in the Senate, but without enough seats to overcome a Republican veto on important legislation, and a strong Republican majority in the House of Representatives - may be the best of all possible world’s for gold investors.

Just a month ago, on October 5th, gold reached an 11-month high just over $1,795 an ounce. Since then, in the run up to yesterday’s election, the yellow metal slumped as low as $1,672 - reflecting the prospects that a Romney victory might bring a reversal in economic policies, a reversal that would be “unfriendly” to gold. Beginning late last week, as the polls shifted back in favor of Obama gold again rallied, nearly touching $1,730 before settling down on speculative profit taking in paper markets.

Gold prices are likely to remain volatile, continuing to exhibit big day-to-day and week-to-week ups and downs as the market sorts out the long-term consequences of four more years like the last four years - four more years of recession-like economic activity or worse, four more years of fiscal gridlock with annual trillion-dollar federal deficits, and most importantly for gold-price prospects, four more years of accommodative Federal Reserve monetary policies.

With the election now behind us, the market’s short-term attention will re-focus on possible Federal Reserve policy initiatives that may be discussed or even initiated at the December 12th FOMC policy-setting meeting. There is already talk of further quantitative easing, expectations of which could soon become a strong up-side price driver.

From a longer-term perspective, the Obama Administration will likely continue to endorse aggressive monetary stimulus as the only game in town to counter recessionary tendencies in the U.S. and global economy. Moreover, when Chairman Bernanke’s term expire in 2014, President Obama is likely to appoint another monetary “dove” to head the Fed.

Similarly, the financial markets (including the market for gold) will increasingly react to the impending “fiscal cliff” mandating a combined $500 billion in tax increases and spending cuts beginning at the start of the new year - that is unless Congress and the Administration can agree to a more tolerable solution to American’s fiscal profligacy - or more likely, Washington will simply “kick the can down the road,” by agreeing to revisit deficit reduction at some later date.

However this sorts itself out, America is following Europe down the road toward ill-timed fiscal restraint, restraint that will only exacerbate recessionary tendencies, and force the Fed to counter with still more stimulative monetary policies.

These and other positive price drivers and physical market fundamentals could form a “perfect storm” for gold in the closing weeks of 2012 - and, quite possibly, we could see the metal approach or even surpass its record high by year-end or early 2013.

Wednesday, November 7th, 2012, by Jeffrey Nichols and is filed under "Gold Briefs ". You can leave a response here, or send a Trackback from your own site.