October 21, 1996 – What will happen to the Gold price after the November election? Will it remain stuck below $400 per ounce, or can we finally expect Gold to begin a rally that will eventually reach my long awaited $500 per ounce target?
No one has the answer to those questions yet, but with the election fast approaching, the outcome will be known soon enough. I think the outcome will be bullish. Here is how I see the course of events from here.
As hard as it is to accept and to believe, it nevertheless looks like we will have Bill Clinton to kick around for another four more years (assuming he’s not indicted or otherwise thrown out of office before January 2001 rolls around). We can assume that his next term will be substantially different. For once in his life Bill Clinton will not be running for any office, so it is likely that the true tax and spend ‘limousine liberal’ that he has been – and presumably still is – will show his true self. That means more deficits, more big government, and other statist actions that will in time prove to be bad news for the economy and the Dollar.
There will also no doubt be some new faces in the Clinton administration. According to one scenario I have heard, Alan Greenspan will be named Treasury Secretary, replacing Robert Rubin, who plans to move back to Wall Street and Goldman Sachs (no doubt to protect his substantial equity stake in that firm in the new and perhaps difficult post-election financial and monetary environment).
Replacing Greenspan at the Federal Reserve will be Felix Rohatyn, whose name you will recall was floated earlier this year when Greenspan’s original term ended. But Rohatyn didn’t get the top Fed job in March because back then the Republicans controlled both the House and the Senate. However, it looks likely that the Republicans will now lose one or perhaps both Houses of Congress, so they will no longer have the votes needed to reject Clinton appointees. With Rohatyn in the Federal Reserve and Clinton no longer having to worry about the next election, do you really think the American public will be better off four years from now?
It looks to me that we are about to see four years of ‘Jimmy-Carter’ Clinton in the White House. The monetary environment will be an inflationary one, spurred on by a new Fed chairman every bit as compliant as Bill Miller, the hapless central banker who unleashed the Carter inflation.
You will recall that Miller was forced out of the top post at the Fed, and after his departure, Paul Volcker stepped in to turn around the rate of inflation and the fortunes of the Dollar. But before Volcker was able to achieve this feat, the havoc wreaked on the financial markets by Messrs. Carter and Miller was profound, altering as it did everyone’s basic confidence in the Dollar. The result of this colossal crisis of confidence in the Dollar was to send Gold off on a wild bull market. It seems safe to say that a Clinton/Rohatyn combination would have essentially the same result.
Finally, there is one other reason to be bullish on Gold after the November election. The central banks have been exerting a heavy hand on Gold. That influence is about to diminish, if we are to believe the comments of Alfons Verplaetse, the Governor of the Belgian National Bank.
The Belgians have been dishoarding their Gold reserve for several years, and the threat of on-going Belgian dishoarding has been hanging heavily over the market, much like when Canada was dishoarding almost all of its entire Gold reserve in the early 1990’s. The following report by Reuters dated October 14th is very significant.
Belgian National Bank governor Alfons Verplaetse said in a newspaper interview that he was happy with the level of the central bank’s gold reserves after sales in recent years and that there would be no further sales. “After selling 700 tonnes, we have a gold reserve in line with the European average,” he told La Libre Belgique. He said G-10 central bankers had an accord not to destabilize the gold market and to ask each other for permission in the case of planned sales. “I have obtained that permission four times. I will not try for a fifth time,” he said. Verplaetse said the central banks estimated it was possible to sell the equivalent of one or two tonnes of gold a day without destabilizing the market.
The above news report is significant for several reasons. First, after dishoarding 700 tonnes of Gold, apparently the Belgians will no longer make any further reductions to their remaining Gold reserve. This decision will no doubt relieve some of the selling pressure that has hit the market in recent years; 700 tonnes is about one-third of annual new mining production, so it is a substantial weight of Gold. Moreover, there have been worries overhanging the market regarding Belgian intentions on their remaining Gold reserve. We now know that further dishoarding is unlikely.
Second, the head of the Belgian central bank confirmed that the G-10 nations are working in concert with one another to keep the Gold market stable, which means they are trying to keep the Gold price relatively unchanged. The central banks have been silently operating in the Gold market. Their force and influence in the market has been deemed likely by most market observers for a long time but denied by the G-10 until now.
Third, the central bankers (Canada, Belgium, Netherlands and others) have been adding one to two tonnes per day to the market in order to keep the Gold price stable. This practice has gone on for several years now and explains in part why Gold remains below $400 per ounce. Take away this extra supply of Gold added to the market from central bank reserves, and the price of Gold will need to rise to clear the market.
In other words, the demand for Gold far exceeds the supply of newly mined Gold at current price levels. This imbalance has so far been filled by central bank dishoarding. If this dishoarding stops, the Gold price will rise, thereby bringing demand into balance with the new level of available supply.
Thus, there are good reasons to be optimistic about the price of Gold. We can conclude that after November 5th, Gold will once and for all finally break the $400 barrier.