Are Gold and Silver Capped Until After U.S. Election?

Gold edged up $4.60 or 0.26% in New York yesterday which saw gold close at $1,767.50. Silver climbed to a high of $34.33 and then fell off and finished with a marginal loss of 0.12%.

Gold has seen volatile and choppy trading overnight in Asia and in Europe this morning with the price being capped at $1,772/oz and in a tight range between $1,767 and $1,772/oz. 

Gold remains robust in euro terms at €1,364.50/oz and remains less than only 1% away from new record highs in the single currency (see chart). 

India and China are embarking on their peak consumption season which may create a boost to the physical market.

The far from resolved debt crisis in Greece, Spain and most countries in the western world means that this is another correction and investors and store of wealth buyers should continue to accumulate on the dip.

Prices may remain contained until after the U.S. election but we expect that soon after the election (we expect Obama to be re-elected), precious metal prices will again surge. Indeed, from November into the early months of 2013, we could see one of the largest upward price movements in gold and silver so far in their bull markets.

U.S. election years tend to see gold underperform vis-à-vis other years and this was seen in 2004 (+4.7%) and 2008 (+5%) when gold saw only marginal gains compared to the 17% annualised dollar returns seen in that decade.

Post election years saw stronger gains – with a 22% in 2005 and a 25% return in 2009.

This is likely due to the governing administration, often in conjunction with the Federal Reserve, doing all it can in order to artificially boost the economy and maintain power.

Indeed, given the degree of intervention in markets today, it is possible that the Working Group on Financial Markets has been intervening in order to maintain orderly markets and “investor confidence” - as is their function. This can often artificially boost stock markets and often see a bout of dollar strength.

We believe that macroeconomic and monetary conditions are far worse than is being acknowledged by the White House, the Washington elites and Ben Bernanke and that once the election is over there will be significant revisions to data and the economic data will decline considerably.

There are historical parallels with the 1933 election when Roosevelt was re-elected and there was subsequently an admission that economic conditions were far worse than people had been previously led to believe. 

This creates the real possibility of significant volatility and dislocations in markets in the coming months.

Buyers should use this price dip and any further dips in October to accumulate physical gold and silver in the safest way possible.

UBS have lifted their full-year 2012 forecast to $1700, from $1680 previously. For 2013 UBS now has price targets on the average gold price of $1900, raised from $1725 previously.

Smart money internationally continues to diversify into gold. Some of the wealthiest and most astute managers of money in the world today remain bullish on gold due to the very favourable macroeconomic, geopolitical and monetary fundamentals. 

The Financial Review (Australian) points out how Soros, Paulson and now Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund are all diversifying into gold (see commentary).

Warren Buffett is one of the few wealthy individuals in the world to have absolutely rejected the idea of owning gold as a hedge or safe haven asset and has indeed criticised those who own gold.

Indeed, the recently made bizarre comments regarding gold saying he would rather buy caves than gold. He suggested that owning caves would be better than owning gold in the event of currency devaluations.

Buffett is massively exposed to man US dollar denominated stocks and to the U.S. banking sector and appears to be either talking about his book or is simply very misguided.  

His reputation as the most successful investor of all time will be questioned in the coming years.

As the Financial Review states:

“Financial planners and super fund managers have come around to holding bullion, previously viewed as too speculative with no investment return, because it diversifies a portfolio and moves independently of shares and other markets.”

There is also academic research showing how gold is a proven hedging instrument and safe haven asset.

In 2013 we are all going to need to own safe haven assets and the safe haven money that is gold.