US Elections Boost for Yellow Metal

November 8, 2012 at 08:35

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Gold prices leapt to their highest level in two and a half weeks as the US election delivered what analysts called “the best result possible” for the bullion price.

The vote for a continuation of the status quo – with Barack Obama re-elected president, the Democrats in control of the Senate and the Republicans in control of the House of Representatives – could set the scene for a strong gold rally towards the end of the year, analysts and traders said.

Political gridlock in Washington and a steady stream of easy money from the Federal Reserve helped gold prices double during Mr Obama’s first term.

“All in all, gold could not have asked for a better outcome,” said Edel Tully, precious metals strategist at UBS.

Gold prices rallied by as much as $30 a troy ounce late on Tuesday in anticipation of the result, before jumping again early on Wednesday as state-by-state results began to point to an Obama victory, touching a peak of $1,731.40 a troy ounce, the highest since mid-October.

The metal was later swept up in the wave of selling that hit other financial markets and retreated to $1,712, but traders said that investors remained keen to stock up now that the uncertainty of the election was behind them.

“The hedge funds did pile out [before the election] and they’ll be rebuilding positions now,” said one precious metals banker. Investors reduced their bullish bets on gold prices in each of the last four weeks, according to Commodity Futures Trading Commission data, spurring a 6.9 per cent retreat from an 11-month high in early October to a low of $1,672 last week.

Analysts said that the election result should be positive for gold for several reasons.

First, the split control of Congress between the Democratic and Republican parties raises the possibility of political stasis, with investors concerned that a lack of action will expose the US economy to a ”fiscal cliff” of tax increases and spending cuts.

Second, the victory for Mr Obama removes the risk that the Fed’s unconventional monetary policy programme could be halted early. Some investors were nervous of a victory for Mitt Romney, believing he would have replaced Fed chairman Ben Bernanke with a more hawkish voice.

James Steel, precious metals strategist at HSBC in New York, predicted that gold could rally to a high of $1,900 by the end of the year, within reach of the all-time peak of $1,920 set last year.

“If divided government means diffused power and therefore greater uncertainty, that would be a recipe for higher gold prices,” he said. “If one looks at the debt extension fiasco last summer – that is what propelled gold to an all-time high. Any replay of that has the potential to push gold up significantly.”