Frank Holmes'  Instablog

While Americans were still submitting their ballots, gold rallied on the possibility of a President Barack Obama reelection. With presidential results confirmed, it appears that Ben Bernanke's job of hovering over the economy and dropping parachutes of money out of his helicopter is secure.

"Gold could not have asked for a better outcome," with a second term for Obama, a Democratic Senate and Republican House, says UBS Investment Research. As the research firm explains in its morning note, "the high likelihood of political gridlock up ahead as attention now turns to the fiscal cliff and the debt ceiling certainly presents upside opportunities for gold."

UBS says the gold market isn't even pricing in the outcome of the next Federal Open Market Committee meeting in December when the "conclusion of Operation Twist will morph into further quantitative easing."

Our chart of the week shows the substantial impact of the Federal Reserve's decision. In a weekly report, Robert Perli of International Strategy and Investment (ISI) projected the enormous growth of the U.S. balance sheet if quantitative easing continues over the next few years.

Currently the Fed is buying mortgage-backed securities at a rate of $40 billion each month. The dashed orange line assumes that if this $40 billion per month continues over the next few years, America's balance sheet expands to about $4.5 trillion by the end of 2016.

However, the $40 billion was on top of the previous spending spree on Treasury securities. Added together, this means that Ben Bernanke is forking over $85 billion per month through the end of 2013, which "makes a provocative picture," says Perli. You can see below that if this open-ended spending continues through the end of 2016, the U.S. balance sheet swells to nearly $7 trillion!

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In his October 1 speech in Indiana, Bernanke explains his reasoning behind the Fed's buying spree:

"We expect these purchases to put further downward pressure on longer-term interest rates, including mortgage rates. To underline the Federal Reserve's commitment to fostering a sustainable economic recovery, we said that we would continue securities purchases and employ other policy tools until the outlook for the job market improves substantially in a context of price stability."

This chart is only one reason gold investors like me are bullish. Here are other positive dynamics for gold and gold stocks:

• Special Gold Report: What's Driving Gold Companies
• Blog Post: A Tipping Point for Gold Companies
• Blog Post: How Helicopter Ben Helps Jobs and, Inadvertently, Gold
• Presentation: Why Gold Stocks are Lagging Gold

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Americans will be united in heading to the polls Tuesday to determine who they want to be the next president and vice president. After months of experts, news reporters and the candidates inundating us with a barrage of facts and opinions, voters have the last word.

Research finds that historically Americans' say has been swayed by very recent stock market performance. Last July, I covered the work of Adam Hamilton from Zeal LLC, who analyzed that the market has typically determined whether an incumbent leader wins. He used InvesTech research dating back to 1900 to look at market results covering the two months leading up to the presidential election.

The majority of the time, when stocks rose in September and October, the incumbent party was reelected; when equities dropped, the incumbent typically lost. He discovered that "out of the last 28 presidential elections, this simple indicator has proven correct 25 times. This is an astounding 89 percent success rate!"

This shows that Americans "make political decisions based on how our families are faring economically," he explained in an October update on this topic. The stock market, as a proxy for the broader U.S. economy, "heavily influences how we cast our ballots."

However, during September and October of this year, the S&P 500 Index rose 0.40 percent, which makes it too close to call an incumbent win. This "essentially dead flat" result has made the few days leading up to the election "super-important." Adam says, "We all figured it would be a close race in our heavily-divided country, and the stock markets are certainly exacerbating this with their schizophrenic September-October ride."

There has also been a close relationship between President Obama's approval rating from Gallup and the performance of the S&P since he took office. Immediately after Obama took the oath, there appeared to be an inverse correlation between the stock market and the approval rating while the president enjoyed a "honeymoon" period. We "had high hopes his leadership would bolster a rapid economic recovery in America," says Adam.

However, following the honeymoon, "Americans' views on the job Obama is doing have been closely tied to the fortunes of our stock markets." Beginning in mid-2010, as the stock market rose, the approval rating for the president climbed; when the market corrected in 2011, so did the Gallup poll.

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What's interesting is that while the S&P has climbed an outstanding 68 percent over the president's term, the president's approval rating sits at only 51 percent as of the end of October 2012. This weak approval has been attributed by several experts to stagnant job growth, a slowing global economy, weak U.S. GDP growth, and a mountain of rules and regulations that have hindered businesses over recent years.

Alan Zafran of Luminous Capital believes that these reasons are why "CEO confidence remains listless, lethargic and dispirited." According to the YPO Global Pulse Confidence Index, which measures executives' perspectives on the business climate, leaders' confidence around the world, except for in Latin America, "fell modestly over the past three months and remains in largely uninspiring territory." As you can see, a majority of CEOs responded that there would be no change in their businesses' employee count and fixed investment.

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He indicates that the most important reason for a slump in CEO confidence is that "uncertainty relating to America's tax code and regulatory environment as well as its health care and retirement systems - particularly in the face of our nation's 'fiscal cliff'-has stymied many American CEOs' willingness to add jobs and buy business equity today."

Zafran concludes his article by calling for "meaningful fiscal action" to get the U.S. economy out of its "financial ditch" and raise the confidence of CEOs. As I often say, it's not about the political party, it's the policies.

Regardless of which candidate wins, Goldman Sachs' research shows that the market is indifferent during the president's first year. As you can see in the chart below featured on Business Insider's website, since 1976, the S&P has experienced a median return of 10 percent over the twelve months following the election of both a democrat and a republican.

(click to enlarge)

How is Energy Affected by the Candidates?
If President Obama is reelected, it could be a negative for certain energy companies involved in natural gas fracking, says International Strategy & Investment (ISI). The research firm put together an "Obama Portfolio" which includes sectors such as taxes, defense, discretionary spending, energy and infrastructure. ISI says that companies "highly leveraged to fracking and onshore drilling in the U.S." could be negatively affected "if regulatory costs are substantially higher in a second Obama term."

Conversely, a Governor Mitt Romney win could be significant for energy companies. In its "Romney Portfolio" ISI's rationale is that Romney and the GOP "will try to do more to promote traditional forms of energy, including offshore drilling, approving the Keystone pipeline, and exploiting the nation's coal resources."

U.S. Global's Director of Research John Derrick also discussed the impact of energy companies as well as tax policy differences between the two candidates with AdvisorOne. Read the article now.

Join Our Post-Election Outlook Webcast
After casting your ballot, make sure to tune into our post-election webcast where I'll be discussing the questions that have been on investors' minds with Money Map Press Investment Strategist Keith Fitz-Gerald. We'll talk about a variety of issues, including the "fiscal cliff," the housing recovery and the future of energy prices. Don't miss it! Add to your calendar today.

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

China celebrated another achievement last week, as Mo Yan became the first Chinese citizen to win a Nobel Prize for literature. The selection of Mo was praised by a Chinese nationalist tabloid as a sign that mainstream China could "no longer be refused by the West for long."

Mo grew up in Shandong province in northeastern China, and during the Cultural Revolution, he left school to work in the fields, finishing his education in the army, according to The Guardian. The author draws upon his rural upbringing in his novels, mixing historical perspective with mythical elements. His real name is Guan Moye, but he chose "Mo Yan" as a pen name meaning "don't speak," to reflect the culture in which he grew up.

The new Nobel laureate is of the same generation as the new leaders set to take over the Politburo Standing Committee next month after the convening of the 18th National Congress of the Communist Party of China. This group of men (and one female contender) are "old enough to remember the suffering of the Cultural Revolution, but also young enough to fully experience how China has grown through Deng [Xiaoping]'s opening of the economy to market forces," says CLSA China Strategy research.

They've seen vast political reforms take place, transforming China "from a country ruled by the contradictory personal whims of Mao to one ruled through institutions and rules," says William H. Overholt in The Washington Quarterly. During these decades, "freedoms blossomed, affecting everything from clothing to haircuts to job or marital choices to social and political speech," says Overholt.

As a result of these policies, they've been able to witness China's incredible growth, with GDP averaging 10 percent per year and more than 500 million people moving out of poverty over the past 30 years.

Now after three decades of tremendous expansion, this new generation of leaders will have to carefully maneuver the country into the next decade, towing the line between maintaining the stability created during the previous Hu-Wen administration and continuing the political and economic reform necessary to adjust to the country's slowing growth.

China's pyramid of power is headed by the Politburo Standing Committee (PSC), which will likely have seven to nine new members led by Vice President Xi Jinping and Vice Premier Li Keqiang, selected by a vote of the Central Committee.

Unlike prior committee members who were mostly engineers, the new PSC members have varying liberal arts backgrounds, including history, law and economics, which may help to "address social concerns after decades of focusing mostly on growth," according to CLSA.

These leaders tend to be more globally aware than their predecessors. They are better traveled, and many have family members, relatives or friends who have gone to school overseas and have foreign residency. "The rapid proliferation of mobile phones, broadband, internet has made unbiased information much easier to access," says CLSA.

Incoming President Xi Jinping is a princeling who was born into privilege as the son of Xi Zhongxun, who was among the first generation of Chinese leadership and "one of the most liberal leaders under Deng." His father's claim to fame was in creating a special economic zone in Shenzhen, which transformed the area from a small village to one of the fastest-growing cities in the world and one of the busiest container ports in China.

Premier Li Keqiang comes from a more common background, as his father, Li Fengsan, was an official of the local government. After the Cultural Revolution, Li was one of the "Class of '77" when only 273,000 people won admission to universities out of a total of 5.7 million candidates. (By comparison, 58 percent of nine million people in 2007 won admission to universities, according to a 2008 article in The New York Times.) He spent 16 years at the Central Communist Youth League, and then 10 more years in the Henan and Liaoning Provinces before becoming a member of the standing committee.

Underneath the PSC is the Politburo with 25 members, then the Central Committee with 371 members, who then dictate to more than 80 million Communist party members.

(click to enlarge)

So what direction will the next generation of leaders take? This remains a "great enigma," says Overholt. Xi has been "extremely cautious" about stating his opinions, however, "he has the confidence that comes from being a princeling and from having some military background." In addition, the other members of the PSC have agendas that are "ambitious and outspoken." The tensions and inconsistencies that exist within the committee members could be "creatively dynamic or immobilizing," says Overholt.

CLSA believes that the new leadership will likely push for reform since they will be "forced to adapt to China's slowing growth." The research firm says that historically, large reforms successfully occurred after a crisis, including Tiananmen Square and the Asian Financial Crisis.

A nearly 500-page document by the World Bank and China's Development Research Center of the State Council may give "promising insight into China's future policy," says CLSA. The comprehensive report called China 2030 identifies a long-term strategy for Chinese policymakers. The report says that "after more than 30 years of rapid growth, China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for."

It irons out six areas that need to be addressed:

1. Structural reforms to strengthen the foundation for a market-based economy need to be implemented
2. Innovations need to be accelerated
3. The country should pursue "green" opportunities
4. All citizens need opportunities and social security
5. The fiscal system needs to be strengthened
6. China needs to seek mutually beneficial relations with the world

The report concludes by saying that "a successful outcome will require strong leadership and commitment, steady implementation with a determined will, coordination across ministries and agencies, and sensitive yet effective management of a consultation process" that encourages the support of the public. The potential for China to be a "modern, harmonious, and creative high-income society" is there, however, "achieving this objective will not be easy," says the report.

In November, the U.S. will be focused on its own political situation as Americans head to the polls. While staying active and involved in national politics is important, I believe it's just as vital to pay close attention to how the leadership change will unfold in the second-largest economy in the world.

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.