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Economy Nov 7, 2012

Obama is good for gold: Target $3,500 by 2013-end?

By Vivek Kaul

So now that Barack Obama is all set for a second term as President of the United States of America, gold is set for another rally. As I write this, gold is quoting at $1,723.2 per ounce (1 troy ounce equals 31.1 gm), up $40, or 2.4 percent, in a day.

And this rally is likely to continue, with some gold bulls talking of a price of $3,500 by 2013-end.

There are several reasons for the same.

The Second Term President phenomenon: Second term presidents in the United States (US) usually tend to go overboard with spending money. This extra spending cannot be always matched by an increase in government revenue and is matched by printing dollars to meet this gap. This money printing devalues the dollar.

As Jan Skoyles, head of research at a UK bullion dealer called The Real Asset Co, put it in a recent research note, "our research also found Presidents granted a second-term have a marvellous time showing everyone just how much money they can spend, devaluing the currency further and making that precious metal glister even more. It seems that during their first terms Presidents are more tempered than in their second. Is this because they decide to blow the doors off and show everyone what a great person they are, leaving the next guy to pick up the mess?"

And the numbers tell the story. Gold rallied 88.8 percent during George Bush Jr's second term. It had rallied only 24.6 percent in his first term. The same stands true for Bill Clinton as well, with gold losing 5.6 percent in his first term and gaining 16.9 percent in his second term. The table here tells the complete story.

Democrats destroy the dollar more than Republicans: The Democratic Party to which Obama belongs has a better track record of destroying the dollar and hence pushing up the gold price. As Skoyles puts it, "The evidence showing Democrats destroying the dollar more than Republicans...is overwhelming. Even though Democrats prove to be the best party for gold investors worried about the gold price, the Republicans don't do too badly themselves - accounting for a net increase of 121.27 percent across their terms in office since Nixon, versus 358.68 percent for the Democrats." Richard Nixon was the President of America between 1969 and 1974.

While the gold is set to rally in dollars, for Indians to make money it has to rally in rupee terms.

Ben Bernanke will continue to be the Chairman of the US Fed: One of the things that Mitt Romney, the Republican challenger to Barack Obama, had made very clear was that he would fire Ben Bernanke, the Chairman of the Federal Reserve of the United States, the American central bank, if he became the President of the United States.

As he had said in August earlier this year, "I would want to select someone new and someone who shared my economic views...I want someone to provide monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril." His running mate, Paul Ryan wanted the dollar to be "Sound Money" again. "We want to pursue a sound-money strategy so that we can get back the King Dollar," Ryan said.

With Obama getting a second term, Ben Bernanke is likely to continue as Chairman. Also he might now even get a third term when his current term ends in 2014. This means that the easy money policy run by the Federal Reserve is likely to continue and this can only mean good things for the price of gold.

Bernanke has been running a policy of quantitative easing and printing dollars, in the hope that banks lend these dollars, and people spend them, and this in turn helps in the revival of the American economy. But this money printing has also led to a stupendous rise in the price of gold.

Any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn't happened till now. Nevertheless that hasn't stopped investors from buyinggoldto protect themselves from this debasement of money.Goldcannot be debased. Unlike paper money it cannot be created out of thin air.

During earlier days, paper money was backed bygoldor silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted intogoldor silver. Now, whenever people seemore and more of paper money being printed, the smarter ones simply go out and buy thatgold. Hence, bad money (that is, paper money) is driving out good money (that is,gold) away from the market.

The US Fed will go slow on manipulating the gold market: Another theory going around is that the US Federal Reserve has been manipulating the price of gold over the years with help from bullion banks. As the gold expert Tehmaas Gorimaar writes, "One form of manipulation is the through setting of low lease rates for gold and silver. Low rates encourage bullion banks like JP Morgan and HSBC to borrow gold and silver from central banks, dump the metal on the market and use the proceeds to invest in paper assets, thereby driving up the prices of these assets." (You can read a more detailed argument on this here).

This manipulation to hold back the price of gold seems to have gone up in the run-up to the Presidential election. As Gorimaar puts it, "Because the dollar, like all other currencies, is a fiat currency, and gold is the antithesis of the dollar, a runaway gold price means that the so called "strong dollar policy" touted by American presidents isn't working. Also, higher gold and a lower dollar would mean higher commodity prices, since commodities are priced in dollars. A weak dollar would also have given Mitt Romney more fodder for attack."

Hence, Bernanke was helping Obama here. Now what would be the quid pro quo for the same? Another term for Bernanke as the Chairman?
With the elections over, the Federal Reserve is likely to take a breather on this front and gold is set to rally. "I think you'll see gold at $ 3,500 per ounce and silver above $100 per ounce by the end of 2013. This is because of the extreme suppression of their prices in this election year," says Gorimaar.

Does that mean gold will rally in India? While the gold is set to rally in dollars, for Indians to make money it has to rally in rupee terms. For that to happen the Indian rupee either has to remain at the current levels against the dollar or depreciate further.

Let us try and understand this through an example. Gold currently quotes at around $1,723 per ounce. One dollar is worth Rs 54.3. This means one ounce of gold is priced at Rs 93,558.9 (one troy ounce equals 31.1grams). If one dollar was worth Rs 50, then gold would have been at Rs 86,150 per ounce. If one dollar was worth Rs 60, gold would have been at Rs 1.03,380 per ounce. Hence the more the rupee depreciates against the dollar, the greater will be the return on gold in rupee terms.

For that to happen the UPA government needs to continue running the screwed up economic policy that it has been over the last few years. And that's one thing they have been doing even better than all the scams that they have been running. So gold should rally in rupee terms as well.

Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com

by Vivek Kaul

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