After months of record costing political rhetoric and spin, the election hype can now start to wane. On Tuesday, the Electoral College re-elected President Barack Obama for another four years. In the final days and hours leading up to the main event, much has been discussed about the effects the presidential race conclusion will have on various investments and sectors of the economy. However, how will the election and longer-term trends impact precious metals?
According to research done by The Real Asset Company, a gold bullion storage firm, the price of gold performs well under either political party, but has typically climbed higher under Democrats. Since Richard Nixon, the president that cut the final link to a gold standard and ended the trading of gold at a fixed price of $35 an ounce, gold has surged nearly 360 percent over the terms of Democrats. In comparison, the precious metal has jumped 121 percent over the terms of Republicans.
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A recent note from HSBC also suggests a correlation between Democratic control of the White House and Congress, and higher gold prices. The bank explains, “The heaviest Democratic majorities in 1975-1979 coincide with a powerful and prolonged rally in gold prices from below $200 per ounce to more than $800 per ounce. In the early 1980s, Democratic majorities were reduced and gold prices eased. Gold declined, however, from 1983 to January 1985, a period when the Democrat majority increased. Gold also moved higher from January 1985 to October 1987, a period when Democrats lost seats but still held a majority,” according to Mineweb.
Under President Obama’s first term, gold reached its highest nominal price in history at approximately $1,920 an ounce. This was a lofty level for gold, but it was still below the inflation-adjusted record of $2,300 achieved under Jimmy Carter. However, with Obama being chosen for a second term, history suggests that it may not be too long before gold breaks this record as well. The Real Asset Company points out that gold often performs even better during a president’s second term, regardless of the party. George Bush Jr. takes the cake with an 89 percent surge in gold prices during his second term, compared to a 25 percent increase in his first term. Ronald Reagan and Bill Clinton both saw gold prices decline in their first terms, but the precious metal rebounded in their second terms with gains of 28 percent and 5 percent, respectively.
Gold is currently below its historic nominal high, but it is still sitting on impressive gains since Obama first took office. Between January 2009 and Election Day 2012, gold prices have doubled. If the precious metal duplicates anywhere near this success for Obama’s second term, investors will be looking at gold prices above $3,000. This may seem crazy or unlikely to some, but $1,000 gold prices were barely a thought back when it was trading at $250 an ounce just a decade ago. Silver has also enjoyed a meteoric rise over Obama’s first term, with its price nearly tripling. In fact, silver is the best performing major financial asset in the market over the past four years, with gold coming in second.
Although it is interesting to view financial markets in terms of political parties, investors should not ignore that many factors besides the sitting president influence the price of precious metals. Democrats remain in control of the White House and the Senate, Republicans keep the House, but Ben Bernanke is still in charge of the printing press. The Federal Reserve Chairman has presided over the central bank as its balance sheet has grown to more than a record-breaking $2.8 trillion, thanks to numerous quantitative easing programs. The latest measure, referred to as QE-to-infinity-and-beyond, purchases $40 billion in agency mortgage-backed securities each month, for an unlimited amount of time. If the Fed continues this QE program, along with its Operation Twist program unsterilized, its balance sheet could hit $4 trillion or even $5 trillion within two years.
While some believed a Romney victory would have led to a more hawkish Federal Reserve, this was unlikely considering the current financial environment. Central banks all over the world are engaged in currency devaluation methods against each other. Over the last four years, quantitative easing by the U.S., Britain, Europe and Japan central banks have injected $6 trillion of currency into the financial system, and they are showing no signs of slowing down.
In addition quantitative easing programs, precious metals are set to benefit from negative real interest rates, investment and central bank demand, and the need to reduce counter-party risk in a financial system swamped with uncertainty and debt. These factors are not only stronger than the party residing in the White House, but could last longer than the next four years.
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Disclosure: Long EXK, AG, HL, PHYS