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By Jack Farchy
Gold prices rallied to their highest level in two and a half weeks on Wednesday as the US election result delivered “the best result possible” for bullion bulls.
The US re-elected Barack Obama as president, and returned control of the Senate to the Democrats and the House of Representatives to the Republicans – essentially a continuation of the status quo.
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That, analysts said, would set the scene for a continuation of the political gridlock in Washington and easy money from the Federal Reserve that helped gold prices double during Mr Obama’s first term.
“All in all, gold could not have asked for a better outcome,” said Edel Tully, precious metals strategist at UBS.
Gold prices rallied by as much as $30 a troy ounce late on Tuesday in anticipation of the result, before jumping again early on Wednesday as state-by-state results began to point to an Obama victory. Overall, prices for the precious metal were up $54, or 3.2 per cent, since the start of the week, touching a peak of $1,731.40 an ounce on Wednesday morning.
The result has inspired gold bulls on several fronts. First, the split control of Congress between the Democratic and Republican parties raises the possibility of political stasis, with investors concerned that a lack of action will expose the US economy to a “fiscal cliff” of tax increases and spending cuts.
“From here on the most likely focal point will be the upcoming fiscal cliff in January, which if not solved could dramatically slow the US,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The political gridlock in Washington has not gone away following the election, and this uncertainty has the potential of supporting the [precious] metals.”
Second, the victory for Mr Obama removes the risk that the Fed’s unconventional monetary policy programme could be stopped early. Some investors had feared that Mitt Romney, had he won the election, would have replaced Fed chairman Ben Bernanke with a more hawkish voice.
But, perhaps most importantly, the US election has removed uncertainty from the gold market, giving investors more confidence to trade on their convictions.
“The uncertainty surrounding the election was gold’s biggest obstacle in recent weeks,” said Ms Tully, noting that investors had reduced their exposure to the metal for the past four weeks running, according to Commodity Futures Trading Commission data.
Gold traders are now likely to focus on the next Fed meeting on December 12, where some believe that the US central bank may announce fresh asset purchases as a replacement for the expiring “Operation Twist” – a move that Ms Tully said the gold market had “not yet priced in”.
