Gold’s fundamentals are shaping up to be as strong as ever heading into the new year.
With the U.S. 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.
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.
Eyes Back On Europe
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 U.S. 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 euros 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.
Smart Money Loading Up On Gold
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 (NYSE Arca: GLD), making him one of the largest holders of the 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.