For many Americans, one of the most depressing aspects to next month’s election will be the fact that there’s a winner. The rhetoric surrounding this contest will go down as some of the most vitriolic in the lifetimes of those watching this meat grinder process limp across the finish line. Strangely there’s been one winner that crosses party lines and remains aloof from petty politics and that’s gold.
Gold futures have chalked up their best settlement so far this month and the precious metal seems to be defying analyst predictions that it will remain in a holding pattern until after the election. If gold was a funding bill, it would be getting bipartisan support.
Ron Paul Endorses, Says Money Outweighs Politics
If investors are hoping the election will be able to calm the markets Ron Paul, former Texas Congressman and Libertarian favorite, says don’t get your hopes up. Paul, who sees very little difference between the two main parties, believes that uncertainty will continue to weigh on markets no matter who wins. He went on to suggest that the laws of economics are more powerful than politics and that continued high levels of debt, combined with an accommodative currency policy by the Fed, will be good for gold prices into the future. Paul believes that gold is one of the few safe places to ride out the ongoing market turbulence he sees in our future.
Inflation Ticks Up
The economy is giving Ron Paul’s comments some backing. Inflation ticked up by 0.3% in September, matching the forecasts of most experts. Americans were paying for gas and rent, but only rent counts toward the inflation calculation as the government measures it. Apparently the Fed doesn’t feel eating and driving should count when it comes to deciding whether you and I are experiencing inflation. Even with those reduced expectations, the inflation rate in September, on an annual basis, would be 1.2%, a number climbing toward the Fed’s two percent target rate. When inflation ticks up, it’s good news for gold and silver prices.
Inflation cuts both ways when it comes to gold prices. Many get hung up on the connection between interest rates and gold prices. When interest rates rise, gold prices tend to move the other way, but not always. The traditional interest rate model for gold prices doesn’t take into account that interest rates are already at historic lows and minor quarter-point interest rate bumps here and there are more psychological than actual economy-changing events. No company is going to change their borrowing practices when interest rates rise from 0.5% to 0.75%. That change is a rounding error on the volume of cash that flows through our banking system. Sure, some companies that are already heavily in debt may get pushed over the edge by higher borrowing costs but those are companies already circling the drain.
To really cause market-shaking change, the Fed would have to raise interest rates by whole percentage points and that’s just not going to happen. A sudden, sharp and unexpected interest rate hike would throw U.S. and global markets into turmoil. A major interest rate hike would send the dollar skyrocketing on world currency markets. If the dollar moved that high tremendously fast, the flow of U.S. goods and services to foreign markets would come to a virtual standstill, corporate earnings would plummet and the stock market would crater.
In that sense Ron Paul is exactly right. No matter who the next president is, the laws of economics will limit any grand ideas either of them have about economic policy. The reality of our new, highly connected global economy will tend to make both parties’ economic policies look more alike than different. Being locked into the global race to the bottom on currency policy will overthrow any grand plans either candidate has for changing the U.S. economy abruptly in the aftermath of the election.
All that means that gold is the one future play that provides some economic certainty in the days (weeks? months?) ahead.