American Politics, The Fiscal Cliff, QE3 & The Gold Market

With the United States presidential election finally having run its course, and President Barack Obama re-elected, people can finally begin to focus on the long-term effects that the election will have on financial markets around the world. Needless to say, one of the core issues of the 2012 presidential campaign in the United States was how each candidate would potentially handle the poor but slowly recovering economy in the United States, and this question has significant implications all over the world. For example, many involved in trading equities, bonds, and commodities such as oil, gold bullion, silver, platinum, corn, and coffee, were closely focused on the election, and how the victory of either candidate would ultimately affect the market, capital gains taxes, and the value of the dollar.

However, for all of the conversation and speculation about immediate effects on the world economy – and specifically on the gold market – the re-election of President Obama in the United States seems to have had little to no immediate effect. Ben Traynor, of BullionVault, one of the largest gold and silver investment websites, specifically noted last week that little has changed in a fundamental way in the gold market. In fact, the price of gold seems to be safely remaining in the same general range it has been in since late summer. The price of gold is very unlikely to reach the $2,000 per ounce mark many predicted it would hit by the end of 2012, but gold remains a stable investment for those looking for a financial haven or alternative to traditional currency.

Investing in gold may prove advantageous after QE3, when the Federal Reserve and Ben Bernanke announced they would be purchasing $40 billion a month in mortgage-backed securities, as well as maintaining interest rates at zero percent until at least 2015. The purchase of MBS effectively pumps $40 billion of liquidity into the financial system and should have the effect of inflating asset prices, from stocks, real estate, and commodities, while devaluing the dollar in relation to other currencies. Investors holding cash in their accounts will see the purchasing power of that cash erode unless they invest in an asset (i.e. gold) that paces or outpaces inflation.

So, with the major event of the 2012 election in the United States safely behind us and seemingly no large shift in the gold as a result, many gold and silver investors are instead turning their focus to the next major financial event in the United States: the so-called “fiscal cliff.” For those outside of the U.S., or those who have not specifically looked into the real meaning of this commonly uttered phrase, it essentially refers to a number of spending cuts and tax adjustments in the United States, such as the expiration of payroll tax cuts (a 2% tax increase for employees), the Bush Era tax cuts that will cost Americans $400 billion in additional taxes, and federal spending cuts for the military, Medicare and entitlement programs. Universally regarded as something of a financial disaster if it is allowed to pass without a compromise, the fiscal cliff will be the subject of much discussion between politicians and economists in the coming months.

So what will the specific effects on the gold market be? It’s difficult to say, but it is certainly conceivable that in the coming months the price of gold could rise significantly. One reason for this is that investors who fear financial disaster in the United States may decide to put their trust in gold bullion as a safer option.

However, the eurozone seems to be mired in disaster with no hope of a quick recovery, which may also lead many European investors to seek stable investments outside of their own economic systems. With the euro in trouble and the dollar heading for potentially dramatic shifts as a result of the fiscal cliff, gold may be a safe option out there for investors looking for protection.

This is about all that can be said at this point with regard to the effect of current United States politics on the market – uncertainty with how government spending and tax rates will be reconciled makes the final compromise reached in Washington anyone’s guess. Nonetheless, it is also important to consider other factors in projecting the price of gold heading into 2013. Simply because the United States is very influential in this market, and happens to have just completed an election cycle, does not mean that other world influences and factors are to be ignored. In particular, the European economic climate, as well as high demand from the Chinese and central banks, will play a key role in deciding how high the price of commodities can rise in 2013.

Gold Prices In 2012

The European economic climate is particularly difficult to read at this time. While there is no doubt that the economies of many influential European countries are struggling – resulting in the struggle of the euro as compared to the recovering strength of the dollar – opinions differ as to how long the problems will last. Some believe that the eurozone is facing extremely grim prospects with a very long road to recovery, which could lead investors to trust in the dollar, gold, or other strong currencies.

Others suggest that there are already some signs of an eurozone recovery, and there is an argument to be made that certain European economies have nowhere to go but up. Watching the recovery effort is crucial for those looking to make gold investment decisions, as the relative strength of the euro and dollar are perhaps the two most telling indicators of the outlook for gold prices.

The Chinese market is also a major factor in projecting the value of gold, and unfortunately the outlook with regard to this market is just as difficult to read as others. On the one hand, China’s top gold mining group is projecting flat output in 2013 due to slowed production of gold, whereas, on a more positive note, China’s Zheng Zhiguang of the Precious Metals Department of the Industrial and Commercial Bank of China explained that China’s gold market has “just started,” projecting strong growth as the demand for gold products and bullion increases. Long known to be a major player in the world trends of supply and demand for gold, China is certainly another country to keep an eye on as you attempt to make sense of investment opportunities for 2013.

Ultimately, the only way to sum up the gold and equities markets heading into 2013 is that it depends on a number of different factors that simply cannot be determined yet. Of course, if reading the market were simple, everyone would constantly profit from it – but in this case, it is fitting to take a cautious approach.

Overall, it is difficult to find many financial analysts suggesting a significant drop in gold prices in 2013. There seems to be a general consensus that the prices of precious metals will rise, but inconsistency in determining just how much this increase will be. Learn more about safe, low-risk investments with our article.