Whats in Store for Gold Post US Elections?

November 7, 2012 at 08:21


Bullion watchers are hopeful that President Obama’s re-lection will mean extending the easy money policy by the Federal Reserve. Historically gold prices were lower during election years and then bounced back the year after the election. Even seasonally going back 30 years , the historical seasonality of gold has been to rise during September, with a subsequent correction in October with the exception of a few years.

The demand supply fundamentals for gold show a well balanced market with a minor increase in supply growth with demand robust possibly outstripping supply. Beginning in 2000, production remained flat, even declining in some years while gold made new highs. In 2008, mine supply of gold fell to levels not seen since the early 1990s. Now, after a seven-year lag, the industry has responded as we’re beginning to see some growth in supply.

The source of demand could be long-lasting and quite significant if you look at emerging market countries’ gold holdings as a percentage of total reserves. In 2000, the European Central Bank decided that the right proportion of gold to own should be 15 percent. If you apply that figure to the potential gold holdings of the emerging market central banks, they would need to accumulate 17,000 tons of gold. Let’s look at our own central bank holdings. The Reserve Bank is holding gold reserves of 557.75 tonne valued at USD 27.02 billion. The value of gold reserve was USD 27.02 billion, which accounts for 9.2 per cent of foreign exchange reserves of USD 294.6 billion. There is potential for another 250 to 300 tons to be added to our reserves, purely going by the ECB formula. And for China, it is still got a long way to go to reach the 15% ECB formula.

Another growing source of demand has been from the scooping up of gold exchange-traded funds (ETFs). Eight years after the products were launched, 12 gold ETFs and eight other similar investments are valued at around $125 billion and almost hold 2,500-2700 tons of gold. ETF buying is expected to continue buying, as the group is driven by the Fed’s and other central banks quantitative easing program. There is a frightening pace of expansion in money supply. The pace at which demand is growing, supply has barely caught up with it.

So, don’t let the short-term correction fool you into selling your bullion holdings in whichever form. The dramatic increase in money supply suggests that monetary debasement will continue, and in addition to all the above drivers, we believe these are the positive dynamics driving higher prices for gold. The risk of course is the event risks associated with the handling of Fiscal Cliff. An amicable solution could lead to immediate sell-off in gold, while the failure to arrive at a solution could lift gold prices to all-time highs.

Technically, Comex gold could be in a $1645-1735 range initially and a daily close above $1765 could indicate the uptrend could have resumed towards $1900 or even higher.