US Election Creates Opportunity for Gold Investors

“I’m bullish on gold in both the short and long term,” said Peter Schiff, CEO and chief global strategist of Connecticut-based Euro Pacific Capital, in a November 9 phone interview. “I’ve been saying that for a long time, and I see no reason to change my tune now.”

The reason? Schiff feels that Obama’s policies hurt economic growth, fuel inflation and raise the country’s debt. That will push up the price of gold because investors typically buy the yellow metal as a hedge against inflation and economic uncertainty.

“Now we know that Obamacare and Dodd-Frank [the administration’s financial-sector reform package] are going to come into effect, and they are going to cause all kinds of damage to the economy. If Mitt Romney had been elected, at least we would still have a chance to stop these bad policies from becoming law.”

Romney had also vowed to replace Federal Reserve Chairman Ben Bernanke when his term is up in 2014. But Obama is likely to leave the chairman in place or bring in someone who follows a similar approach. That’s another positive catalyst for gold, said gold analyst Jeffrey Nichols, managing director of American Precious Metals Advisors.

“With the election now behind us, the market’s short-term attention will re-focus on possible Federal Reserve policy initiatives that may be discussed or even initiated at the December 12th FOMC policy-setting meeting,” he wrote on nicholsongold.com. “There is already talk of further quantitative easing, expectations of which could soon become a strong up-side [gold] price driver. From a longer-term perspective, the Obama Administration will likely continue to endorse aggressive monetary stimulus as the only game in town to counter recessionary tendencies in the U.S. and global economy.”

“Fiscal cliff” is a short- and long-term catalyst for gold

Investors and the business media are also turning their attention to the so-called “fiscal cliff” — an array of tax hikes and spending cuts that are set to kick in on January 1 unless Congress and the president can strike an agreement to avert them. That’s a particularly tough challenge, given that Republicans control the House of Representatives.

Ultimately, Schiff feels there will be an agreement, but it will only set the stage for more upheaval down the road. “Unfortunately, yes,” he said. “But that is only going to create a bigger cliff later because we will have kicked dealing with our debt problem down the road yet again.” Still, Schiff feels the uncertainty surrounding the fiscal cliff will contribute to rising gold prices.

That’s a view shared by a number of other analysts, including those at investment bank UBS. In its Precious Metals Daily note, quoted by Mineweb on election day, UBS said that an Obama victory “implies that a resolution on the fiscal cliff and the country’s debt ceiling are likely going to take some time, with much political wrangling. The uncertainty surrounding negotiations arising from the political gridlock should have a positive impact on gold.”

Gold prices should rise faster than mining costs

Gold fell the day after the election. It has since moved higher, but not as quickly as some analysts expected. “I think people need to keep in mind that we had a $35 rally in the run up to election day,” said Schiff. “You can never tell what’s behind short-term market moves, but I expect there will be a bigger move higher.”

“The gold price should definitely be higher than it is right now,” he said. “If more people understood the severity of the economic trouble the US is in, more would buy. But there is a lot of ignorance out there. And that creates opportunity.”

So what’s the best way to capitalize? “Ultimately, I feel there are more profits in gold stocks,” said Schiff. “Gold prices are up, but gold producers have not profited due to the fact that the cost of getting gold out of the ground is also rising. The gold price has only kept pace with that increase — and sometimes not even that.”

Still, Schiff now feels that gold prices will accelerate faster than mining cost inflation. “Let’s just say, for example, that the price of gold rises to $3,000 an ounce next year. There’s no way the cost of mining would increase that fast.”

Stick with “real gold”

If you want to invest in gold itself, Schiff recommends buying gold bullion and staying away from jewelry, collectibles, numismatic coins and the like. “I’m not recommending that people go out and become coin collectors to protect themselves against inflation,” he said. “People need to buy real gold — bars and coins like the Canadian Gold Maple Leaf and the American Eagle — and pay a very small premium to the gold content.”

Beyond gold, Schiff warns investors to avoid US government bonds and US dollar-denominated investments. Instead, he recommends foreign stocks and bonds, as well as shares of other resource producers, including base metal miners and oil and gas firms. “I think all resource companies will do well in this environment,” he said.

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.