Gold 2013: Strong Fundamentals

Why one analyst thinks the "smart money" is loading up on gold...

WITH the US presidential election behind us, the spotlight is back on global economic growth with a specific focus on the European sovereign debt crisis and the American fiscal deficit, writes Amine Bouchentouf, a partner at institutional advisory firm Parador Capital LLC and author of the best-selling Commodities For Dummies (John Wiley & Sons), in his new column for Hard Assets Investor.

When all is said and done, we are pretty much facing the same scenario we did before the American election. In fact, not much has changed: Barack Obama is still president; the Democrats still hold a majority in the Senate; and the Republicans still hold a majority in the House. So except for a few districts changing aisles, the country is essentially in the same political position it was in prior to the election.

As far as markets are concerned, gold has reacted positively to the post-election landscape. As I analyzed previously, gold markets tend to perform well during post-election periods because of the political stability and visibility that's established – and this has certainly been the case this year as well, since Gold Prices are up post-election.

Unfortunately, the global growth picture remains murky at best, especially the European sovereign debt situation. The state of affairs in Europe is actually getting worse by the week.

Soon after the US election, European financial ministers held an emergency summit in order to save Greece from imminent default, as the European country risks missing payments on €15 billion of bonds. At the time of this writing, no imminent solution has been found for the southern European country, partly because weary creditor countries (such as Germany and Finland) are tired of maintaining the Greek economy on life support.

In addition, the Greek situation is having a cancerlike effect on the rest of the Eurozone economies. It's not news to anyone following Europe that Italy, Spain and Portugal have also been labeled as the "sick men of Europe." However, in a very dramatic and potentially existentially threatening turn of events, France seems to be following the path of its weak neighbors.

French economic activity has slowed down dramatically, its exports are weak and its rigid workplace rules (employees can only work a maximum of 35 hours per week) are hurting its economic prospects; so much so that two of the most prominent credit ratings agencies – Standard & Poor's and Moody's – both cut France's credit rating. This essentially makes it harder for the country to borrow money in the international markets, and is a sign that the country is on a very weak footing. Considering we're talking about the second-largest economy in Europe after Germany, it is a very worrying turn of events indeed.

Amid all this turmoil in the United States and Europe, smart money investors are once again loading up on gold. John Paulson, the hedge fund manager of Paulson & Co., who made his name shorting the housing market in 2008, continued going long gold. As of today, Paulson owns almost 22 million shares of SPDR Gold Trust, making him one of the largest holders of that Gold ETF. In fact, Paulson's stake has increased by more than $360 million since the beginning of the year.

Another prominent fund manager who is long gold is George Soros. Soros also resumed accumulating gold through GLD shares after the election, claiming that it is a hedge against the follies of politicians. Indeed, in this environment of political deadlock in both the United States and Europe, investors have lost confidence in the political system to stimulate economic growth. Investors are losing confidence in the central banks to be able to bolster paper currencies – in this kind of environment, investors prefer to keep their money in a hard asset that has a historical margin of safety.

While the Western media apparatus was glued on the US presidential elections, an equally important election was taking place halfway across the globe: China. While not exactly a Western-style election, China appointed its new leadership for the next decade. Unlike in the United States where the leadership is chosen every four years based on a popular election, the leadership in China is chosen for a period of 10 years by the dominant Communist Party.

The new secretary general of the Chinese Communist Party – as the official leader is known – is a relatively unknown party insider: Xi Jinping. Xi comes from a long line of Communist Party insiders; his father was one of the leaders of the Communist Revolution. With his appointment, the Chinese establishment signals its intention of continuing a state-directed market economy that has averaged close to double-digit returns over the last decade.

For the global economy, that can only be a good thing. China has been the world's engine of growth as Europe and the United States sputter.

For gold investors, it means that 2013 is looking extremely bullish from a macroeconomic perspective. The European Union is in a precarious state, which means that investors will keep buying gold as a hedge against currency devaluation; the United States will likely continue its easy monetary policy, meaning that investors will continue stocking up on gold as a hedge against inflation; and China is signaling a domestic pro-growth agenda, meaning that Chinese physical purchases of gold as a store of value will continue unabated.

As election season is officially over and as the year comes to a close, gold is looking very attractive for 2013, with a high price – on my analysis – of $2500 in the coming year.

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