Investors will likely remember that it was about a year ago that gold hit a $1,900 peak. Since then it has been a bumpy ride for the metal. On Tuesday, gold was at about $1,666 an ounce. Weak prices have been blamed on a number of factors — from lack of demand in India and China to the European debt crisis — but there may be another explanation: the upcoming US election.
Gold prices generally languish in the year leading up to a US presidential election, said Terry Hanlon, president of Dillon Gage Metals (DGM), a bullion dealer.
In a note published last week, the company reminds investors that in March 2008 gold prices rose to over $1,000, but dropped to $740 in November when the elections took place.
“Not only do incumbent presidents try to keep the public focused on good economic news” — which is not good for gold, writes Hanlon — “but the White House also typically tries to jawbone the price of gasoline downward to keep inflation in check.”
Poor economic data and inflation are two major drivers for gold. Individuals who cite the connection between lower gold prices and US presidential elections believe that political leaders distract gold investors by distorting the picture of the economy and embellishing upon the record of their policies.
For a better understanding of the situation, all investors need to do is tune into the news following the release of important economic data such as a US employment report. The Republican camp, aiming for the White House, will insist that the latest release proves that the economy is ailing. President Obama’s camp will be ready to insist that the same data shows that, to the contrary, the country is heading in the right direction and doing much better than it did under the leadership of Republican President Bush.
But prominent gold supporters insist that shenanigans can only divert attention away from gold for a certain amount of time. Reality always surfaces, they warn.
One such supporter is Peter Schiff, CEO of Euro Pacific Precious Metals. He believes that money cannot continue to be “just a piece of paper” backed by nothing but other paper currencies.
Schiff explained to Gold Investing News that most paper money initially existed as a substitute for gold. That gave it currency value.
Now, with a fiat-based system that places the dollar at the center and recognizes it as a reserve currency, he warns that the global monetary order is on the verge of a reset, or collapse.
Schiff said that when that happens, gold is the most logical choice as a reserve.
Generally, it is people active in the gold space, such as Schiff, who are vocal about the need to reintroduce gold into the monetary system. Decades have passed without serious dialogue among US politicians about using gold as money or linking the dollar to the yellow metal, but such ideas are reemerging.
Many analysts believe that a return to the gold standard won’t work and think that considering it is ludicrous and nonsensical.
For one thing, many opponents argue that there is not enough gold to support the United States’ debt.
However, the idea of a gold standard was sane enough to make its way onto the agenda at the Republican National Convention this week.
According to a Money Morning article, attempts to implement a gold standard would present practical issues. In addition to gold prices skyrocketing to perhaps $10,000 an ounce, the dollar would also greatly appreciate, wreaking havoc on international trade. Such a move would also require the government to balance its budget and would force state governments to abandon welfare programs.
Regardless of the outcome, the Republicans’ focus on the gold standard will certainly boost some investors’ confidence in the metal. Additionally, it will draw attention to less-than-ideal economic conditions, such as the US government’s spending habits, ballooning deficit and inability to balance its budget.
These are issues that prompt investment interest in gold even when there is not an election involved.
Such concerns are the reason that individuals such as Hanlon believe that while gold suffers during an election year, prices will rise after Americans go to the polls, no matter who wins.
After the 2008 presidential race, most markets had been ravaged by the financial crisis. With a new president in place and the intense campaigning behind, DGM reminds investors that gold embarked on a steady advance and doubled under the Obama administration.
Gold investors are therefore encouraged to buy and go long.
