With President Barack Obama’s successful re-election, the case for higher gold prices got even stronger.
Let me give you seven reasons that gold prices are destined to head much higher in the next several years.
Let’s call it the Obama ‘baker’s half-dozen’ case for gold:
The Central Banker Effect on Gold Prices:
Official statistics, which some observers dispute (I’ll get to that in a minute), say that the world’s central banks have become net buyers of gold for the first time in nearly a quarter century. If that’s the case, that’s clearly bullish for gold. At the very least, we’re not going to see any big selling.
The Central Banker Effect on Gold Prices (Part Deux):
Although we referred to the ‘Secret Gold Standard’ to underscore the point that central banks were returning to the gold market, we made clear this wasn’t a literal return to a Bretton Woods-style ‘gold standard’.
There’s not enough gold in the world to support such a move – which is why Capital Economics Chief Economist Julian Jessop recently estimated that a return to the gold standard would cause the price of the yellow metal to spike to $10,000 an ounce. There’s an important lesson here: If central banks are hoarding gold, prices can’t help but go higher – gold standard or not.
The Gold Conspiracy:
There’s a growing concern about just how much gold the world’s central banks actually own. For instance, the U.S. Federal Reserve and some of its counterparts do reveal the specific amount of gold held in their inventories.
What they don’t tell you, however, is who owns the gold that they’re holding. Countries like Germany keep big portions of their gold-bullion holdings with the Fed and with the Bank of England (BOE). Those aren’t the only issues about the difficulty in separating ‘ownership’ from ‘possession’.
Nevertheless, think of it this way: If gold holdings actually are lower than reported, it points to only one thing – scarcity. And scarcity equals higher gold prices.
The Euro Trashed Financial Markets:
MoneyWeek reports the German Bundesbank last month reached a compromise deal with the German Audit Court (a civil body that makes budgetary recommendations) for an audit of Germany’s gold reserves, which are apportioned almost entirely between Paris, London, Frankfurt and New York.
Some pundits are saying this is a sign that Germany is giving credence to the gold conspiracy theories. But MoneyWeek columnist Matthew Partridge sees it as a sign that Germany expects the euro to plunge.
The catalyst for that free-fall will be a still-secret ‘quantitative-easing’ initiative that’s actually a fourth-down/Hail Mary lob that officials pray will avert a Eurozone collapse. A massive money-printing of that type would cause the euro to plunge – and gold to rise in an offsetting manner, Partridge contends.
The Easy-Money Crowd Parties On:
Fed policymakers have said they expect to keep short-term U.S. interest rates down near zero until mid-2015 (unless the economy strengthens considerably before then). President Obama’s re-election means this will continue as planned.
He’s appointed five of the six board members other than Chairman Ben S. Bernanke (who Obama also re-appointed). Whenever you have ultra-cheap money available, it flows somewhere and usually does major damage somewhere in the world. It also ignites inflation of some sort.
This time around the inflation initially showed up in the U.S. stock market – igniting a rally that sent stock prices up to near-record levels … in the face of the worst financial crisis since the Great Depression.
The Not-So-Safe ‘Safe Haven’:
Gold bullion initially soared 1% in a celebration of the Obama victory. The next day gold prices then reversed course and sold off. Analysts claimed it was due to fiscal-cliff worries.
But the European Commission disappointed the markets by announcing that Eurozone growth would remain non-existent in the New Year (with high unemployment), and wouldn’t resume until 2014. The euro plunged as investors abandoned it for the ‘safe-haven’ US dollar. The dollar rallied, causing gold to fall. That ‘safe-haven’ view of the US greenback isn’t going to last much longer.
The Obama Effect on Gold Prices:
Several months back, Money Morning editor Keith Fitz-Gerald predicted that gold was in for a near-term reversal. And he was right. With Obama’s re-election, that ‘yellow metal’ correction could continue – but only in the near-term.
As Keith explains it, traders have used gold to collateralize other investments, and will have to sell some to raise cash. That will put additional downward pressure on gold in the days and perhaps weeks to come. Consider that a ‘buying opportunity’, Keith says: ‘President Obama’s first-term policies created a lot of damage and his second term is likely to reinforce the need to preserve value even more. That puts gold in a league by itself.’
Here’s What to Do as Gold Prices Go Higher
There are lots of ways to play, profit from or own gold, but we like two in particular.
The first is the actual gold miners.
And the second is physical gold.
Physical gold – bullion, for instance – gives you ‘hard-asset’ protection against rampant inflation. It’s tangible, has an ‘intrinsic value’ (unlike paper securities, whose value is derived from an underlying asset), and is a good hedge.
It’s liquid, you can carry it around, and it can be used as currency in situations where there’s a breakdown in the markets, or in the economy.
Either way, the combination of Fed Chairman Bernanke and President Obama is extremely bullish for gold prices from here on out. And you don’t need to be a true ‘gold bug’ to make money on it.
William Patalon
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)
From the Archives…
APRA Spins Another Yarn On Australian Banks
9-11-2012 – Kris Sayce
The Secret Return to the Gold Standard
8-11-2012 – William Patalon
Forget the US Election, This Stock Market Event is the One to Watch For
7-10-2012 – Murray Dawes
The Greeks Giving Economists Nightmares
6-10-2012 – Bill Bonner
Super Fund Results: Whoopdeedoo
5-10-2012 – Nick Hubble
Obama Wins: Why the Case For Higher Gold Prices Got Even Stronger
