Why Obama's Victory Means Higher Gold Prices

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Our recent story on the secret return to the gold standard drew an interesting response from Money Morning reader John B., which I've paraphrased below.

In response to the article, John wrote:

"All this talk about buying gold. Where is the gold going to come from? No one seems to be selling. And what about all the scamming that's going on in the gold market these days?"

Here's the thing: John essentially agrees with the case we made for gold – he just doesn't realize it.

And with President Barack Obama's successful re-election, the case for higher gold prices got even stronger – overnight.

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:

  1. The Central Banker Effect: 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.
  2. The Central Banker Effect (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.
  1. The Gold Conspiracy: As the comment by John B. underscores, 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.
  2. 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.
  3. 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). As we've explained, 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 (as Permanent Wealth Investor Editor Martin Hutchinson explained to Private Briefing readers back on Aug. 21), 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. Once "asset inflation" of that sort infects your economy, Martin says "the transition from asset inflation to consumer inflation typically happens very quickly."
  4. 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" U.S. dollar. The dollar rallied, causing gold to fall. That "safe-haven" view of the U.S. greenback isn't going to last much longer.
  5. The Obama Effect: Several months back, Money Map Press Chief Investment Strategist 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 themselves – especially the so-called "junior miners" favored by Real Asset Returns Editor Peter Krauth.

Junior miners are typically younger companies – and are often still in the "exploration" phase of development. If their mines hit big, investors, too, hit big. And there's a second way to score: A lot of these smaller players become takeover candidates – usually at big premiums.

Mining stocks have badly lagged the resurgence that gold prices enjoyed earlier this year, which is precisely the reason Peter likes them so much.

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.

Peter has already recommended several top gold plays to my Private Briefing subscribers. One of them has already more than doubled, giving readers their fourth triple-digit gain this year.

If you'd like to join the thousands of investors we've already helped to make big money on gold click here. Believe it or not, you can do it for just 26 cents a day.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. Deborah G Flynn | November 13, 2012

    Although I am not wealthy I have been buying gold and silver every week small increments at a trime. if I can't afford an ounce I buy a half ounce if I can't afford that I buy a quarter ounce but the sensible thing to do is buy as much as you can afford, stop eating out three times a week and buy a bit of the yellow stuff. the facts are it will never return to the $600 an ounce level and if you buy a small amunt religiously then you have averaged your cost down and will be very happy. They even have 1/10th ounces for those of you who think you can't own gold. When you retiure the tax man has no control over it. Need something? there will always be people willing to buy some from you.

    • Michael Lucas | November 13, 2012

      What are the best methods for buying gold and silver?

      • silver viking | November 13, 2012

        Check out silvergoldbull.com I've searched high and low for the best prices out there, and these guys have it. Very fast shipping to boot. Check em out.

    • BHOLMES1 | November 13, 2012

      Deborah …

      Excellent and eloquent response. Thanks for taking the time to post it.

      I hope we hear from you again ….

      William Patalon III
      Executive Editor
      Money Morning & Private Briefing

  2. Arthur Robey | November 13, 2012

    A breakdown of Fiat money?
    You must be kidding me. Since when has Fiat money ever broken down?
    Not counting Zimbabwe, Argentina, Czechoslovakia, Germany . . . OK. Except for those, tell me of one example of Fiat money failing. Impossible.

    • Kevin Beck | November 13, 2012

      Arthur, the way fiat money fails or breaks down is when the people of that nation stop accepting it for the purchase/sale of goods and services. Or when the prices start to rise, such that merchants are re-pricing their goods throughout the day, every day. The second scenario would happen first; this would be the break-down. Then when the first scenario happens, you have the failure.

      As a side note: Just because fiat money never failed, doesn't mean that it can't happen. Keep in mind that history doesn't repeat, but it certainly rhymes.

    • Edmund Kristof | November 19, 2012

      Arthur, why would you count in Czechoslovakia? I am born in Czechoslovakia, I do not remember any type of real currency breakdown in our modern history… I believe, the only dramatic currency breakdown we have experienced due WW2. If this is what you talk about, you should enlist a handfull of other european countries along with Czechoslovakia and Germany…
      Anyway,
      ask Germans about a streghth of their always superstrong currency… Their life time savings were swept away by the War and Reichsmark (and rebuilt it!), then by reunification with East Germany and its EastDeutsch Mark (rebuilt it again!), then by creating euro (now they are done for good, I guess)… every now and then their population goes from one of the strogest world´s currencies to a deep sh…
      Should they all keep their savings in gold (no nonsense – pure statistics in terms of purchasing power) over the past decades, they´d be all smiling big time :) With Euro? Forget. The bad news is, that for euro investors american dollar seems to a good deal – hihihihihi…

  3. Al Kowsky | November 13, 2012

    John B. asks "All this talk about buying gold. Where is the gold going to come from? No one seems to be selling." Nothing could be further from the truth. There are unlimited dealers buying & selling gold. Quick surfing on the internet will reveal this. Finding dealers with a reasonable buy-sell spread may take a little time. The question John B. should be asking is "When is the best time to get into the market?" Some analysts believe gold will drop further & others believe gold has bottomed out now. What do the experts of Money Morning believe?

    • pietroi | November 13, 2012

      gold streaming check it out. In my opinion this is a 'no brainer" for investment.Sandstorm Gold

    • BHOLMES1 | November 13, 2012

      Dear Al …

      Super question.

      As the old adage tells us, “timing is everything,” and timing is the real question here, isn’t it … I mean, most folks agree with us that gold has to go higher. But as you point out, the question is … when.

      Several months back, Money Map Press Chief Investment Strategist Keith Fitz-Gerald predicted that gold was in for a near-term reversal. And he was right.

      And though I included some of his more-recent comments in my story here, I gave Keith a ring to see if he would expand upon his comments just for you.

      Here’s what he said this afternoon.

      “This is a great question, BP … and the answer depends upon the time frame. If you’re looking at the long haul, I believe that gold is tremendously undervalued. I expect a combination of factors – including demand, the trillions of dollars that have been printed/injected into the economy and the development of new partially asset backed international drawing rights to create higher prices ahead."

      "In the near-term, however, I still believe the risk is to the downside. The Eurozone situation remains problematic on a number of levels. And gold prices could also correct (fall), if traders have to contend with redemption requests, or if there are other factors that force them to raise cash.”

      When Keith is talking about "traders," he is referring to the fact that they may have trading positions that are collateralized with gold. If they are forced to raise cash, they might have to sell that gold to do so, which could put downward pressure on “yellow metal” prices.

      There are also some “market mechanics” to keep in mind, Keith told me.

      Historically speaking, the months that follow presidential elections tend to weak for gold prices, he explained. But the year that follows tends to be strong. If that pattern is followed here, it would mean the rest of 2012 won’t be so hot, but that the odds for a rally in 2013 are high.

      In fact, Keith says he won’t be at all surprised to see a sharp drop (sell-off) in gold prices before the year ends.

      “I can’t say when, or how big, that drop will be – chiefly because the U.S. Fed and the other world central bankers are doing all that they can to keep the financial markets from flat-lining … which is distorting the normal and healthy market-adjustment mechanisms that exist,” Keith said. “But I expect that we will see [a correction]. … When that occurs, consider it a buying opportunity. 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 special category, making it an asset that all investors should include in their investment plan.”

      Again Al (and several other readers who posed a similar question), nicely done. Let’s hear from you in the future …

      Respectfully yours;

      William (Bill) Patalon III
      Executive Editor
      Money Morning & Private Briefing

  4. E Barry | November 13, 2012

    I have been buying phyisical gold and silver since 1972. I am 60 now and still buying. Worst case senerio it is in my piggy bank.I hope they keep printing the paper dollars.

  5. d sager | November 13, 2012

    We were told silver would skyrocket to a minimum of 50.00 per ounce by maybe June 2012 and so far its down 2-3 dollars per. Looks like Asia doesn't want it as bad as we thought they would..

    • silver viking | November 13, 2012

      The timeline may be off. That's because no one can really predict when. If your into silver for the long haul you won't be disappointed .

  6. Ken Buak | November 13, 2012

    Mr Patalon III seems to dance around the very real hazard of government confiscation.

  7. Ken Oden | November 13, 2012

    Like so many people, many think short term or small circle, often until next pay or welfare check. Ron Paul explained everythng about the Federal Reserve fraud, corruption, debasement and counterfeiting to us starting over 33 years ago. It was the reason that he went into Congress and has served us better than any other congress-person all the 12 sessions that he was RE-elected. Those who have not listened to and learned from him will suffer as their govt funny money continues to evaporate and become worthless. It's called the fraud of Keynesian Establishment combined DeeemonCrap-Repugnant welfare-WARfare New World-One World Govt-promoting Big Govt Party [singular] ruining our nation here and now. IMO U No Who

  8. Rick Boswell | November 13, 2012

    The best way to buy physical gold is American one ounce or half ounce Eagles. If you fear the government will confiscate gold, then you should buy numismatic (collectible) gold because it was not confiscated by FDR's decree in 1933. This would include Double Eagles ($20 gold coins) and Eagles ($10 gold coins).

  9. W Satorius | November 13, 2012

    I'm confused. I just read one of those subscription ticklers that says per economist Harry Dent, that gold is going to drop to $750 an ounce by late 2014. That we are headed into deflation, not inflation, and much worse times of unemployment, housing foreclosurers, and bank failures very soon. That the QE3 will run out and the propped up economy it funds will fall apart.

    • Counting Ace | November 13, 2012

      It's called a market. If everyone believed gold is going to $2,000/oz, it would be there already! You can always find an "expert" predicting something. You just have to do what you think is right.

    • JJM123 | November 13, 2012

      Satorius – The potential that PMs are over priced initially concerned me greatly. However, I realized that the Fiat Dollar is only worth the promise of value and it's real value is the paper & ink (or electrons). The Fiat Dollar can easily result in less than 1/10th its purchase ability, while an ounce of gold will continue to purchase a Good Suit and an ounce of silver will continue to purchase a large sack of groceries or several gallons of gas.
      Worst case: According to the Inflation Calculator (which is based on CPI, if you can believe their figures) "What cost $20 in 1900 would cost $532.07 in 2011." If the dollar has lost 97% of it's purchase power in the past century, $20 then = $666.67 now. So based only on inflation and dollar depreciation, $750 gold would be possible.

  10. Ron Webb | November 13, 2012

    BINGO, Ken Oden…….1 PARTY. pretending to be "2"
    OLIGARCHY…..STATISM…..TYRANNY…..Call it what you wish !!!
    NOTHING IS "FREE", in Ameri-Ka !!!
    Not "markets"…Not people…NOT TRUTH (You have to dig for it,…& recognize it!!!)
    And "last, but not least"…NOT ELECTIONS !!!
    Those not recognizing this, are "SHEEPLE", & their SLAUGHTER is "eminent & ongoing"…
    AS IT IS, FOR US ALL !!!
    WAKE UP…YOU MIGHT CHOOSE TO DO SOME THINGS DIFFERENTLY, BASED ON KNOWLEDGE,
    RATHER THAN ILLUSION & SUBTERFUGE…
    "Just sayin`"

  11. publius | November 13, 2012

    The kinds of discussions always bring out the tin foil hat folks. Waiting for comments about the FreeMasons, the CFR, the Bilderbergs, the Trilateral Commission, etc, etc.

  12. usman | November 13, 2012

    Well said Ken Oden and Ron Webb. what you speak of is absolute truth; unfortunately however, most people don't realize n know this truth. Infact, by use of propaganda people like us are called ignorants, naive or conspiracy theorists. when actually opposite is the case

  13. andrew | November 13, 2012

    PHYS – outside US and if you hold it just 1 year you get capital gains tax treatment of max rate 15%, compare that to all the other bozo ideas. Of course if you can afford your own vault outside the US by all means hoard away!

  14. Martin | November 14, 2012

    The rats have eaten away the Gold and the blameless ‘Obama’ effect will continue for decades. The earth’s crust is stable but the dear metal price will continue flying till the Antarctica’s water level reach the Alps. Most nations show a doubtful gold figure to the planets metals inventory. All together the team of scientists, geologists and the political experts will be voiceless along with the Investors in coming years.

  15. steve white | November 14, 2012

    I have not a comment, but a question. I am advisor to
    some governments in Central America. They ask me
    frequently: What should their policy be about the gold
    that is being produced and exported from their countries
    by foreign companies? Should they buy it all, and keep
    it as a reserve? Thank you for your opinions. Steve.

  16. deane gilmour | November 14, 2012

    Gold and Sliver investments are far better than paper and even coinage since they can are are being devalued. BUT the real survival commodities are food stuffs and their continuing supply, water sources and ammunition or the way to make such. I am an old man but I see a time coming soon when homes and land will be confiscated by governement and redistributed to those they wish. The only answer besides Christ return to do away with all this attempting to provide manmade Utopia throught government control is to find an inaccessbile spot to grow food, water, and land to produce them as we did before the urban sprawl that crammed humanity together like rats in the sewers living off each other, yes even using each other for food and survival. I have precious metals stashed in secure points but even that becomes worthless when others who have items for survival care not one iota for the shiney metals. Fuel, Food, and Water. Fatalistic, maybe, but then, who would have ever thought that the USA, land of promise of freedom, liberty and the responsibilities that go with such would become just another dicatatorial socialistic attempt at manmade UTOPIA. The great experiments of Socialism have only lasted a scant 80 years or so and even the last of the large nations governed by that dictatorial ideology is now slowly becoming more and more capitalistic. Socialism can only last as long as there are capitalist to supply it with its needs. And when the Socialist outnumber the Capitalist the end of humanity is very near. I believe it was Margaret Thatcher said it best and most truthfully.

    • Marta | November 16, 2012

      Is silver a good investment now and for long term? And also does silver do well even if there is no inflation?

  17. Brad Morgan | November 18, 2012

    Everybody screams inflation! Inflation! Yes, in the short run, but the question is, how long can the ship be artifically kept afloat until things have to come back to reality. Soon or later an aggregate lack of demand is going to drive us to deflation. Then much debt will be absolved painfully…. ie… Great Depression #2. The thing about inflation and deflation to consider, especially as a social- economic tool for governments and central banks is their superb ability to naturally redistribute wealth when they reach significant enough levels for a long enough time.

  18. Leland Waterman | November 27, 2012

    Holding farm land and gold to counter inflation, I believe, eventually creates problems. For instance, my father's family farm purchased in 1930 in southwest Virginia cost 12,000 dollars for 400-acres then. By 2000, it was worth one-million dollars. Back then, my grand mother and two brothers managed the farm which was financed by a loan from New York Life. Essentially then, one cow and its yearly calf would pay for an acre of land. These figures no longer apply since now it would require almost 10 cows and ten calf off-spring every year to pay for one acre of land. These were ordinary people who had been in farming. Many people could have qualified for this loan then. But now, how many can qualify for a million dollar loan? The surviving brother at the farm essentially gave it away to a neighbor who promised to care for him until his death. I suppose he believed that too few people could ever purchase it at that price?

  19. Daniel | June 6, 2013

    Well, it's june 2013 and gold prices are still falling… go figure

  20. dave wilson | September 9, 2013

    last nov. you said that gold prices were going to skyrocket, may be you can enlighten me as to what happened

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