What would a Romney Presidency mean for your investment portfolio? Part II

Part I of this article looked at Mitt Romney’s plan to address America’s slowing growth rate, high unemployment and out of control spending. Part II will examine the other key changes that Romney promises to make, and then assess what a Romney presidency would mean for investors and what they should do if indeed he is elected.

American energy independence

According to the US Department of Energy, in the month of September 2012 America imported 314 million barrels of oil at a cost of $35.4 billion. US oil imports are averaging 329 million barrels a month and contribute around $425 billion a year to the US budget deficit.

In 2011 around 45% of the crude oil and petroleum products (which includes gasoline, diesel fuel, heating oil, jet fuel etc.) consumed by the United States was imported from foreign countries. This makes the US economy vulnerable to price spikes and disruptions in the supply of oil.

Although domestic oil and natural gas production has increased in each of the last four years, production on government land has actually fallen. The increases in production have come from private land.

Mitt Romney has pledged to make North America energy independent within 8 years, something which will require “genuine support for increased energy production, a more rational approach to regulation, and a government that facilitates private-sector-led development of new energy technologies by focusing on funding research and removing barriers”.

Romney’s plan involves the following:

  • Empowering states to control onshore energy development.
  • Opening up offshore areas for energy development, such as off the coasts of Virginia and the Carolinas.
  • Establishing a regional agreement to facilitate cross-border energy investment and promote cooperation with Canada and Mexico. This would include the approval of the Keystone XL pipeline which was rejected by President Obama.
  • Facilitating new energy assessments to determine the true extent of America’s resources.
  • Reforming environmental laws and regulations to strengthen environmental protection without destroying jobs or paralyzing industries.
  • Facilitating private-sector-led development of new energy technologies while focusing the federal government on the job it does best – research and development.

From mittromney.com: “Dramatically increasing domestic energy production can bolster the competitiveness of virtually every industry in the country, creating millions of new jobs from coast to coast. With fewer energy imports and more exports of manufactured goods, America’s trade deficit will decline and the dollar will strengthen.”

Romney estimates that his energy policies would create more than three million new jobs, including over one million in manufacturing, while also adding more than $500 billion to GDP. If successfully implemented his policies would help to reduce the trade deficit and likely strengthen the US dollar.

Changes at the Federal Reserve

Romney has also said that, if elected, he will not reappoint Ben Bernanke as chairman of the Federal Reserve when his current term expires on 31 January 2014.

This could mean a departure from the central bank’s current ultra loose monetary policy, though there is no guarantee that Bernanke will seek a third term even if President Obama is re-elected. In fact, the New York Times has reported that Bernanke has told close friends he probably will not stand for another term. Therefore regardless of who is in the White House come January 2014, there could be a new Fed chairman.

Speaking about the selection of a new Fed Chairman in a recent interview on Fox Business, Romney said, “I would want to select someone who was new to that position, someone that shared my economic views, that I thought was sympathetic to the needs of our nation, and I want to make sure that the Federal Reserve focuses on maintaining the monetary stability that leads to a strong dollar, and confidence that America is not going to go down the road that other nations have gone down to their peril”.

What would a Romney Presidency mean for your investment portfolio?

There is a significant difference between the policies of the two presidential candidates and a Romney victory seems likely to have a sizeable impact on both the US and global economy, and by extension the global financial markets.

As was mentioned in the article Would a Romney victory really bring change?, Mitt Romney and his running mate, Paul Ryan, “favour policies that are much more inline with Austrian free-market thinking”. They are also proponents of tighter fiscal discipline and smaller, less intrusive government. The pair promise to cut taxes which will provide a much needed boost to the productive private sector, tackle out of control spending and debt, make America energy independent, and make a fundamental change at the Federal Reserve.

If Romney is elected and he does follow through on his campaign promises, we could see a substantial change in both monetary and fiscal policy, which may well strengthen the US dollar and reduce investor’s appetite for precious metals.

The trend reversal would be particularly pronounced if Romney were to bring in a Fed Chairman in the mould of Paul Volker. However since Bernanke will remain head of the Federal Reserve until January 2014 the Fed’s ultra loose monetary policy seems likely to remain in place at least in the near-term. In fact, I expect the Fed to announce additional stimulus measures within the next three months.

One thing that both political parties do agreed on is the need to avoid next year’s fiscal cliff, and this too looks unlikely to change the near-term outlook for large fiscal deficits. This is also the finding of investment research firm BCA Research.

Writing on Tuesday BCA concludes that “the November 6 election is unlikely to result in any immediate material changes to U.S. macroeconomic policies. Large fiscal deficits will persist and the Fed’s balance sheet will continue to inflate. These policies will exert downward pressure on the dollar.”

The bottom line

Even if gold priced in US dollars does fall it won’t completely invalidate our investment thesis, since as UK-based investors the 247Bull portfolio holds physical gold and silver denominated in British Pounds and therefore it is the relationship between gold and sterling that is important to us. The same is true for holders of gold and silver located in the Eurozone or other regions in which QE continues unabated.

A sell off in gold priced in US dollars would however hurt the valuations of most of the mining companies in the 247Bull portfolio, and it is for this reason that we will be closely monitoring the US election and the market’s reaction to it.

One thing that a Romney victory probably would mean is that the stealth bull market that is just beginning in stocks would gain significant traction. As a result we would see a greater number of US Blue Chip companies participating in the advance and we would likely reweight our portfolio towards US Blue Chip stocks.

Those holding gold denominated in US dollars, and those with considerable exposure to precious metals equities should consider hedging the outcome of the US election. One option for doing this would be to place sell orders for gold, or the HUI gold stock index, below $1,700.

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