A Good Month for Precious Metals

10/25/2012 7:15 am EST


John Stephenson

President and CEO, Stephenson & Company

Historically, gold and silver make some nice moves in November, and with all that's going on this year, it may be more significant, observes John Stephenson of Strategic Investor.

The US presidential race has tightened considerably, with the election likely to be decided by voter turnout, coming down to whichever side is more successful at rallying its base. Recent polls show Mitt Romney leading nationally, but trailing Barack Obama slightly in key battleground states, with less than two weeks to go until the election.

With both parties advancing vastly differing visions for America, and with major corporations such as General Electric (GE) and Honeywell (HON) sounding the alarm about the budget policy gridlock in Washington, a decisive victory for one party or the other is crucial to getting the economy back on track.

But that’s unlikely to happen. There’s an increasing likelihood of continued policy gridlock in Washington, which if left unchecked will result in dozens of tax and spending cuts being triggered automatically, unless Congress can reach a deal.

This “fiscal cliff” could slash as much as 3.75% off of US economic output next year. And with economic forecasts calling for 2013 US growth rates in the 2% to 2.5% range, the inability of policymakers to agree on anything could stop this recovery in its tracks.

In Europe, the plans for a banking supervisor have advanced, while the Greek bailout is badly off track. The International Monetary Fund (IMF) has been pushing the Eurozone to find ways to reduce Greece’s debt, but the European Central Bank (ECB), which holds around €50 billion of Greek bonds, as well as various Eurozone governments have resisted any suggestion that they forgive the debt owed to them.

With virtually all European economies at or in recession, and with the US likely to muddle along for the foreseeable future, the IMF issued yet another sobering forecast of impending doom. Markets shrugged off this latest dismal forecast and focused instead on last Wednesday’s blowout US housing number, which reignited the stalled rally in US real estate stocks.

In China, a once-in-a-decade leadership change is about to take place on November 8, with Xi Jinping set to assume the post of General Secretary and President, succeeding Hu Jintao.

This leadership change comes at a time when China faces huge challenges of sustaining growth and reorienting the economy toward domestic consumption and away from export-led growth. China’s over-reliance on low-end exports has exposed the country’s economic expansion to Europe’s debt crisis, resulting in a third-quarter annualized growth rate of just 7.4%, the slowest pace of growth since early 2009.

This last quarter represented China’s seventh consecutive quarter of slowing, and China’s retrenchment is echoed in falling global commodity prices and sagging profits for companies ranging from luxury clothing makers to heavy equipment manufacturers.

And while Chinese officials have been working overtime to dream up a new economic model that isn’t as reliant on fixed-asset investment and exports, the policies of Xi Jinping aren’t expected to deviate much from those of his predecessor. Xi is expected to chart a similar course, with an emphasis on growth at any cost.

One bright spot for China occurred in the last quarter, with the average disposable income of urban households climbing 13% compared to the same period last year. China’s efforts to raise wages will be key in restructuring the Chinese economy toward domestic consumption and away from a reliance on international trade.

Increasingly, it’s beginning to look like a long, slow slog for stocks in the face of continuing economic sluggishness from every corner of the globe. Western economies appear set to try to devalue their currencies in an effort to jumpstart growth.

And with central banks beginning to prime the pump, gold has been a savvy bet. During the last ten years, gold and silver have seen prices have spiked higher in November with gold rallying 3.4% (month over month price change), while silver has moved 5.3%, on average.

The months following an election in the United States is also a great time to be a gold investor, since spending and inflation tend to pick up in the first few months of a new administration. With markets stalling and investors such as PIMCO’s Bill Gross calling for investors to buy gold, shouldn’t you be adding a little gold to your portfolio?

Read more from John Stephenson here...

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