Obama re-election means ‘Perfect Storm' for gold - Nichols

Gold prices reacted sharply upwards to President Obama's re-election, with the US dollar initially falling, now gold is back at the $1,715 level. Obama's re-election has certainly had a positive effect on the gold price. Some mainstream gold bulls believe the Obama re-election will be long term bullish for the metal.

Author: Lawrence Williams
Posted: Thursday , 08 Nov 2012

The gold price reacted sharply upwards to President Obama's re-election, with the U.S. dollar initially falling, but then the dollar recovered as Europe's woes continue to depress alternative currencies and gold has drifted back - but remains, at the time of writing, comfortably back up above the $1715 level - at least for now.

The Obama factor has certainly had a positive effect on the gold price whereas a Romney victory might have driven it lower, and the gold bulls certainly feel that this could be the trigger gold really needs to take off to new heights - although their predictions for the U.S. economy in general are dire suggesting that any signs of recovery will be shortlived.

Indeed Marc Faber of Gloom Doom and Boom newsletter fame told Bloomberg TV: "I am surprised with the re-election of Mr. Obama. The S&P is only down like 30 points. I would have thought that the market on his re-election should be down at least 50%...I think Mr. Obama is a disaster for business and a disaster for the United States. Not that Mr. Romney would be much better, but the Republicans understand the problem of excessive debt better than Mr. Obama who basically doesn't care about piling up debt. You also have in the background Mr. Bernanke, who with artificially low interest rates enables the debt to essentially escalate endlessly."

Indeed if the U.S. does go into recession - or move into a deeper recession as some would put it - and the stock market dives, this could also impact the gold price negatively - at least initially. Remember 2008. But then gold could bounce back even stronger.

However some mainstream to bullish analysts feel that the Obama re-election will be long term bullish for gold - indeed strongly so. Take respected gold analyst Jeff Nichols' post election take on the gold price as a good example. He feels that Obama's return to the White House, but with Republicans maintaining control of the House of Representatives and the Democrats with only a weak majority in the Senate, represents the best of all possible worlds for gold investors.

Indeed looking from outside the U.S.'s borders the extreme polarisation of views between Republicans and Democrats and seemingly huge antipathy between the supporters of the two sides does not bode well for any kind of consensus government emerging. The current Obama government policies though are likely to continue which means more of the same - with Ben Bernanke remaining in office seemingly committed to continuation of the Quantitative Easing programme already set in place, and thus no end to the ever increasing U.S. debt situation.

As Nichols puts it "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 expires in 2014, President Obama is likely to appoint another monetary ‘dove' to head the Fed."

Although one would logically assume that the forthcoming ‘fiscal cliff' which would mandate big tax increases in combination with sharp spending cuts, which comes to a head in January, should be avoided through bi-partisan agreement in Congress and the Senate, the current bad blood between Democrats and Republicans may not see this come to pass, thus turning another screw in the potential downward spiral for the U.S. economy. Nichols feels that some temporary accommodation may be reached, which will effectively kick the can down the road, but this cannot be certain in the current climate, but in the meantime the gold price could be extremely volatile as first one faction, and then the other, appears to be winning the battle.

All in all though, should some form of fiscal restraint eventually be put in place, this would see the U.S. following the European road - and what a disaster that is proving to be for the moment - which will exacerbate recessionary tendencies - and end up forcing the Fed not to reduce monetary stimulus, but to add further to it. This, reckons Nichols, "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."

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