Now that Obama has been re-elected to a second term, I will look at possible investment opportunities based on his agenda. The Obama administration has demonstrated that it is in favor of increased Government control and central planning. The administration now has the fiscal cliff at the forefront of issues to solve in the immediate future. If nothing is done to resolve the fiscal cliff, the New Year will be rung in with a 2% tax increase for workers, the end of certain tax breaks for businesses, the end of the Bush tax cuts, and the beginning of taxes related to Obama's health care law.
With QE1, 2, and 3 already implemented in Obama's first term, we can probably expect the continuation of quantitative easing in the second term to keep the economy on life support. Obama has the Fed Chairman, Ben Bernanke, ready to wave his QE wand again as needed to keep interest rates low to stimulate economic growth. The continuation of this money printing should put continued pressure on the value of the dollar.
With the likelihood of the value of the dollar falling further and with fears of falling off the fiscal cliff, investors may want to consider owning iShares Gold Trust (IAU). Gold should continue to rise as the value of the dollar falls over the next few years and with European debt woes coming into play on a re-occurring basis.
The IAU ETF is designed to replicate the movement of the price of gold bullion. The shares are backed by physical gold and are held in vaults in Toronto, New York, London, and other locations. The ETF returned 19.95% annually since inception on January 21, 2005. There are over 6.7 million ounces of gold in the trust.
IAU is the better choice over SPDR Gold Shares (GLD) in my opinion not just because of price, but also because of its lower expense ratio. GLD is priced at $168 per share and has an expense ratio of 0.40%. IAU is priced at $16.87 and has a low expense ratio of 0.25%.
The U.S. national debt is currently at $16.2 trillion and rising. This equates to over $51,000 of national debt per person and over $133,000 per household. The price of gold has risen right along with the rise in the national debt. The price of the IAU ETF more than doubled from about $8 when Obama took office in 2009 to its current price of $16.87, while the national debt rose from $10.6 trillion to $16.2 trillion over the same period. With Obama's spending continuing in his second term, the national debt is expected to be over $20 trillion in 2016.
Although the price of gold will fluctuate in the near term, I am confident that it will increase over at least the next four years during Obama's second term. The falling dollar, along with low interest rates, and growing U.S. debt are a recipe for higher gold prices. The IAU ETF is a great way to play this.
Of course there are no guarantees that gold will continue rising. It is possible that the fiscal cliff will be resolved, Europe solves its debt problems, the national debt up-trend will reverse, the GDP begins to grow over 3% sustainably, the unemployment rate drops significantly, and the Fed's QE efforts are stopped. However, it is not likely that this will happen. If these things do happen, the value of the dollar is likely to rise, which could lead to a sustained drop in the price of gold. I do think that it is likely that the fiscal cliff will be resolved, but all of the other scenarios will probably remain in play.
It is also possible that the price of gold remains stagnant. If the economy just trots along, the unemployment rate remains about the same, and Europe remains in the same shape without any new positive or negative catalysts, then the price of gold could stagnate.
With all of this in mind, I think that there are enough fears out there to keep the price of gold rising.