Obama Victory Bullish For Gold

Includes: GLD
by: Nicholas Pardini

With Obama winning re-election and the Republicans holding control of the House of Representatives, this election has not provided any clarity related to the fiscal cliff. However, the re-election of President Obama does provide confirmation on the direction of the price gold. The election of President Obama and the existence of a divided Congress is bullish for gold due to fiscal policy instability and the likely need of further money printing to sustain current levels of government spending.

My first reason for being bullish on gold is that it will benefit from the political instability generated by worries related to the fiscal cliff. During the 2011 debt ceiling debate and the resulting S&P downgrade (May 16th-August 5th), gold rose 9.7% in a nine week period while the US dollar and stocks sold off heavily. The fiscal cliff controversy has more politically on the line with both the expiration of Bush tax cuts and reductions in government spending. Fear related to the outcome of this debate on the future of the US economy, the creditworthiness of Treasuries, and the value of the US dollar. In the unlikely case where the US federal budget does run off the "fiscal cliff", the panic trade is likely to lead hot money to precious metals.

On the other hand, if the fiscal cliff is resolved, the outlook is still bullish for gold. First, the reelection of Obama maintains Ben Bernanke's job security. Through his loose monetary policy, Bernanke has been a gold bug's best friend and the Fed is now unlikely to be interrupted in further easing measures. If the economy slows further due to global weakness abroad or gridlock preventing pro-growth policies, the Fed may increase the size of its MBS purchasing stimulate the economy with QE4. Just rumors of more Fed action will be enough to create a sizeable move gold.

In addition, a resolution the fiscal cliff will likely be more like a punt. Government spending will remain high, and tax raises will be limited at best. As a result, the only way the US will be able to pay for continuous deficit spending is through the printing press. Monetizing deficit spending will trigger inflation and with it drive up gold prices.

Skeptics against the inflation thesis would argue that the Fed is independent from the Treasury and will not continue to subsidize government spending because it violates the dual mandate. The question I pose these skeptics is what other choice does the Fed have? Without Fed intervention, demand for Treasuries will decline as investors grow more aware of the possibility of the US's insolvency and the Fed will have to put a bid in to prevent interest rates from skyrocketing. Without Fed intervention, yields would be much higher and thus increasing federal borrowing costs to an unsustainable level. Bernanke's track record and the likely lack of fiscal solutions will mean that monetary policy (and thus dollar debasement) will become the primary means of public financing.

Overall, Obama's re-election is good for the gold market. Fear related to the fiscal cliff and the inevitability of using the printing press as a tool of public finance will be strong bullish catalysts for the near future. My target for gold prices is $2200 by the end of 2013, as fears of political instability and stagflation starts to re-enter the US economy.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , Elections, Gold
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