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Beyond U.S. Election Results: Fiscal Cliff Is Bullish For Gold

Friday November 02, 2012 14:28

Editor's Note: Catch the latest addition to Kitco.com! Seasoned Metals Analyst, Kira McCaffrey Brecht will be sharing her extensive commodities knowledge on Kitco.com. Kira has been writing about the financial markets for over a decade -- posts during her career include Managing Editor at TraderPlanet, Chicago Bureau Chief at Futures World News, Market Analyst at Bridge News and Technical Analyst for MMS International and Managing Editor at SFO Magazine.

Brecht: Markets On the Move

While Americans will be riveted to their television screens the evening of Nov. 6, a perhaps even bigger economic event lies just beyond the trip to the polls, which could have a long-lasting impact on the gold market.

No matter the outcome of the U.S. election, the looming fiscal cliff of $400 billion in automatic spending cuts and tax increases looms large and is expected to trim U.S. economic growth next year even if a compromise is struck between the political parties.

There are a variety of measures that both political parties agree upon, which are likely to be allowed to expire at the end of this year, including the termination of long-term unemployment benefits and the 2% payroll tax holiday. "Even if a congressional compromise is reached, 1% to 1.5% in 2013 fiscal drag is likely as both parties agree various tax cuts should end in December," wrote Alec Young, global equity strategist at S&P Capital IQ in a research note.

Mark Vittner, senior economist at Wells Fargo pointed to the temporary reduction in the Social Security tax and said "that's a goner. That will end at the end of the year. And, there are new taxes associated with the health care law that will come into play and extended unemployment benefits end. None of this is even open for discussion."

With the polls showing a virtual dead heat ahead of the election, an even worse outcome than one winner or loser could be another repeat of the 2000 presidential election in which the issue of hanging ballot chads and differing outcomes in the Electoral College and the presidential vote pushed the election results into the hands of the Supreme Court.

"Let's just hope we don't get a contested election," said Pat O'Hare chief market analyst at Briefing.com. "In a closely contested race no matter who wins it concerns me that party members will have their nose bent out of shape. It could make it challenging to get a fiscal cliff compromise that the market has priced in," O'Hare said.

In recent weeks, economists and market watchers have been widely quoted across the media with assumptions that some sort of Congressional compromise will be struck to help avoid the full impact of the fiscal cliff. Economists of all political persuasions agree the U.S. is vulnerable to slipping back into recession next year if the fiscal cliff is not addressed.

"The market fully believes that Congress will not let things fall over the cliff. What isn't accounted for in the market is for nothing to happen and that is not an improbability," O'Hare warned.

Financial market action will be nervous and volatile in the final months of the year with a close focus on news out of Washington D.C. If more political gridlock does derail compromise plans, the U.S. equity market would likely react negatively as it prices out the expectation for a fiscal cliff solution. That would also be negative news for the economy and keep the U.S. Federal Reserve's current quantitative easing program fully in play.

Bottom line? There is nothing on the horizon that suggests U.S. economic growth will get back to what economists consider "trend" or more normal growth levels around 3-3.5% anytime soon. Nomura forecasts 2013 GDP for the U.S. at a mere 1.5% pace, a sluggish pace by any measure.

With the fate of the economy in the hands of the politicians near term, risks remain high for an even slower U.S. growth rate than that lackluster 1.5% forecast. Translation? More quantitative easing and the bull market for gold continues.

By Kira Brecht, contributing to Kitco.com, follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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