Gold will reach $3,360 by 31 December 2016 after Obama is re-elected for a second term.
Barack Obama’s victory in yesterdays presidential election virtually assures that the US will maintain its ultra-loose monetary policy. We can therefore expect the debasement of the US dollar and thus the rise of gold to continue. In fact, if gold were to continue to rise at the average annual rate that it has for the past 11 years, we can expect it to reach $3,360 by the end of December 2016.
Continued currency debasement
As we discussed in the article Six options for resolving the global debt crisis, currency debasement, i.e. money printing and inflation, will be the solution favoured by western politicians for dealing with their colossal debt burdens.
This assertion was confirmed in September when both the Federal Reserve and the European Central Bank announced open ended stimulus measures.
As explained previously:
“As governments print new money they not only destroy the nominal value of paper money, they also destroy the nominal value of debt. This is by far the most politically palatable option. For example, if a government can maintain an average inflation rate of 4% for a period of seven years, it will have eroded nearly 25% of its debt.”
Going forward we can expect the Fed to continue its ultra-loose monetary policy. For example when Operation Twist (the Fed’s programme of bond maturity extension) comes to an end at the end of the year, we can be confident that further QE will be enacted to take its place.
Even if Ben Bernanke doesn’t seek a third term as Fed Chairman when his current stint comes to an end on 31 January 2014, it is likely that Obama will appoint another neo-Keynesian to replace him. It’s even possible that he will appoint Paul Krugman, a man who believes Bernanke isn’t printing money fast enough.
$3,360 gold by 31 December 2016
The Fed’s continued debasement of the US dollar will continue to fuel the bull market in gold. Since making a low on 2 April 2001 at $255.95 per ounce, gold has risen every single year producing an average annual return of 17.7% with no negative years.
If gold were to continue rising by 17.7% per year for the next four years, we could expect to see the yellow metal rise from yesterday’s close of $1,715.60 to $3,360 by 31 December 2016.
As the data table below shows, I have assumed that gold will end the year at $1,750 per ounce. This is a pretty safe assumption given that seasonally November is gold’s strongest month producing an average 3.2% rise since 2002, versus an average monthly rise of 1.5%.
A 12 year chart of gold (Click on the chart for a larger version)
Personally I believe a $3,360 gold price by 31 December 2016 is too conservative. Those that have studied past bull markets will know that as they mature their ascent steepens, and as the chart below shows, that is exactly what has been happening with gold.
Charts courtesy of stockcharts.com
Investors who feared a potentially fiscally conservative Romney Presidency can relax. Obama, Bernanke and Co. will maintain their weak dollar policy leaving gold’s progress unimpeded.