Going for gold in 2012

The election this year is going to have a huge impact on the price of gold. This is because no matter who the winner is, they are going to have to do something quick about the current monetary crisis that the country has been facing. No matter what the solution ends up being, it will benefit gold prices.

By Matthew Bishop and Michael Green
March 12, 2012
MSN Money

This year's presidential election will have a big impact on the price of gold -- and, no, that's not because we think Ron Paul has any chance of claiming the White House. Gold investors hoping for a Paul presidency had to realize on Super Tuesday his chances of winning the presidency and fulfill his promise to 'end the Fed' are slim. Such investors might be better off putting their pile on red number seven on the roulette table than betting on the precious metal's biggest political champion.

Nor has there been much cheer for them on the markets, as gold has continued its recent slide after a long bull rally. Yet, whoever the Republican nominee is, this election is likely to provide lots of reasons to be long on gold.

Ron Paul deserves credit as the only candidate to have singled out the crisis of money as one of the defining political issues of our age. As everyone knows, whoever takes the oath next January is going to face some tough choices to get the U.S. economy going again and do something (anything!) meaningful about the deficit.

Rather than confronting hard-pressed voters with difficult choices, the temptation to smooth the path with yet more slack monetary policy is going to be strong. If you see any sign during the presidential race that the new administration -- of whatever variety -- is really going to tackle these problems, gold may be a sell. But, so far, the evidence points the other way.

Given all that government debt that is piling up, the temptation for politicians to engineer a bit of inflation may prove stronger than their deficit-slashing zeal. Such action would ease the deleveraging process by shrinking the real value of past borrowings. And it might even help the housing market by pushing the heads of underwater homeowners back above the waves again.

There would be a cost to such an inflationary policy, but as we argue pessimistically in our new book "In Gold We Trust," ripping off savers may be the easier political choice than trying to get voters to accept higher taxes or lower benefits. Even better for the inflaters, the inevitable weakening of the dollar might help the recovery by making U.S. exports more competitive. And the ongoing trouble in the eurozone that is not going to get better any time soon means that assets denominated in the main alternative paper currency to the dollar will remain about as appetizing as a week-old Big Mac.

No politician will say it, but the temptation to mess with the value of money as a politically-viable solution to the economic and fiscal crises is going to be hard to resist. Just as FDR pledged allegiance to the gold standard when he was inaugurated in March 1933 and reneged on the promise a few months later, expect all candidates to promise to protect the dollar -- until they get into office.

Back then, U.S. citizens who held onto their gold, despite Federal Government edicts that they hand it over, made gains of nearly 70% as the price of gold leaped from just over $20 an ounce to $35. History could repeat itself.

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