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The US Elections, US Dollar, Stocks, and Gold

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The decline in gold is likely not over but relatively close to being over.

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With the US presidential election drawing near, it is beginning to look like Mitt Romney may actually have a shot at the White House. This prompts gold investors to wonder how such an outcome might affect financial markets and especially gold. What if Mitt Romney wins? The election may impact everything from mortgage costs to the cost of financing the US debt. Trillions of dollars are at stake.

The theory goes that Romney will replace Fed Chairman Ben Bernanke whose current term will expire in any case on January 2014. He has said as much. This might slow down the perpetual money printing machine, which would be a bearish signal for gold. It would add uncertainty to monetary policy and increase market volatility.

If Romney were to be elected, a front-runner for the Fed Chairman post is Glenn Hubbard, Dean of Columbia Business School and Romney's top economic adviser. Hubbard is not enamored with Bernanke's methods.

A new Fed Chairman might raise interest rates, which would lead to a short-term economic contraction and increase the government's cost to service its debt. Only last month the Federal Reserve unveiled a program to keep interest rates at or near zero until 2015. If a new Fed chairman raises interest rates, that would be a bearish signal for gold since it would make bonds more attractive to investors. Bernanke believes that rates should not be raised before the recovery is firmly "entrenched." He says that removing the stimulus too early would tilt the economy back into recession. A more conservative Fed Chair appointed by Romney may think that recession is an acceptable cost for getting off the perpetual money printing train.

Both candidates talk about reducing the deficit; both want to extend tax cuts to avoid the upcoming fiscal cliff. Romney may talk about reducing spending by $5 trillion but has also called for a whopping $2 trillion increase in military spending. We better not hold our collective breaths for any debt reduction. If Romney were to actually follow through, this could be seen as a temporary negative signal for gold since it would make the dollar look more trustworthy.

Romney has stated that if elected president, he would label China a currency manipulator, which could lead to a trade war with the dollar being devalued versus the yuan. Romney believes that China's currency is being kept artificially low, to the detriment of US manufacturers. "The president has a regular opportunity to label them as a currency manipulator but refuses to do so," he said during the last debate, and repeated his pledge to do just that if he's elected. (Coincidence or not, China's yuan hit a multi-year high Wednesday against the dollar.) Any currency war, a decline in the dollar and a further discrediting of fiat currencies would be bullish for the price of gold.

Romney has talked about establishing a gold standard commission. If put into effect, it would be incredibly bullish for gold.

It is interesting to note that Romney owns gold, between $250,000 and $500,000 according to his disclosure.

No matter who wins the election, we believe that gold and other precious metals should be a part of any gold and silver investor's portfolio. The US economy is in trouble and there are no quick fixes. If spending levels are cut and the quantitative easing program derailed, the economy would contract bringing the US to center-stage in a Greek style tragedy. If, on the other hand, the US continues its Keynesian policies, the country could face serious inflation. So it won't matter much to the price of gold if it is Obama or Romney who occupies the White House this January. Deficit spending and money printing will ultimately continue like there is no tomorrow even though gold could dip if Romney does indeed win. If Obama wins, we will likely see a quick rally in the precious metals in the short term. The long-term picture will remain bullish in either case.
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No positions in stocks mentioned.
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