US budgetary stalemate could have a negative impact on the price of gold

 
Ashraf Laidi
AS A historically close US election comes to an end, the outcome may still be uncertain. But more certain is the less ambiguous outcome of a potential Mitt Romney victory – a negative impact on gold and other metals, due to his intention not to re-appoint Federal Reserve chairman Ben Bernanke when his term expires in January 2014. Considering Bernanke’s support for ongoing quantitative easing, which will continue until US unemployment falls below 7 per cent, removing him would cause serious damage to gold, while likely boosting the US dollar.

The implications for metals are magnified by the threat of the US fiscal cliff. In the event that Congress does not take action to avert the crisis by the end of the year, the combination of spending cuts, and expiration of Bush-era tax cuts, are expected to remove $607bn (£379.7bn) from the US economy, or 4 to 5 per cent of total GDP. It is estimated that this will drag down growth, possibly resulting in a 2 per cent GDP contraction in the first quarter of 2013.

There is also the possibility that, if Romney wins, he may ask Bernanke to resign immediately. The balance of power in Congress is also crucial: a congressional status quo (a Democrat-led Senate and a Republican-led House of Representatives), combined with a Romney victory may reduce the odds of falling off the fiscal cliff, but could still pave the way for a Bernanke exit. However, the worst-case scenario for gold would be if Romney won and there was no change in the House, along with the further loss of Republican seats in the Senate.

The combination of a Romney victory and persistent budgetary stalemate in Congress would have a negative knee-jerk reaction throughout metals trading. Gold has already shed half of the gains that it has made since summer. It could lose a lot more this quarter, and risk testing the $1,600 level.

Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: www.cityindex.co.uk/market-analysis