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Gold’s October Surprise Could Herald a Replay of 1976 or 2008

By Louis G. Navellier October 10, 2016

Gold touched a low of $1241.60 last Friday morning, October 7. That’s a huge (6.8%) decline from the London closing of $1322.50 the previous Friday.  The commonly-stated reasons for this decline centered around the tired old story of the on-again, off-again rumors of a meager 0.25% interest rate increase by the Federal Reserve in their December meeting of the Federal Open Market Committee.  Any positive economic statistic tends to raise the likelihood of a rate increase, which tends to depress the price of gold.

This explanation doesn’t pass the “smell test.”  How can a microscopic and highly uncertain increase in a single short-term rate cause gold to lose almost 7% in a week? As it turns out, there was a massive (3.2 million ounce) sale in the gold futures market in the first few minutes of the trading day last Tuesday, October 4.  Like ETFs, the COMEX gold futures market is one of those “paper gold” exchanges in which massive amounts of theoretical (not physical) gold can change hands in an instant.  Like the overall stock market, where High-Frequency Traders (HFTs) can exacerbate the price swings in specific stocks or ETFs, the gold futures and ETF markets are the “tail that wags the dog” when it comes to gold’s price.

This huge Tuesday morning trade could have been the result of a forced liquidation or it could have been some large hedge fund’s bet on (1) a Fed funds rate increase, (2) better economic statistics ahead or (3) a Hillary Clinton victory, which should be less bullish for gold than a win by the maverick, Donald Trump.

Long-term gold investors should rejoice in such corrections since it presents them with a superb buying opportunity.  The problem with that advice, however, is that it has become so much of a cliché that critics snort, “Don’t try to catch a falling knife.”  Any correction is a buying opportunity, but that is usually the time when investors begin to second-guess themselves about the reasons for buying the investment in the first place, so let’s look at a little history for a clue to see if this is a gold “buying opportunity” or not.

We have already shown – in exhaustive detail – that a rate increase is not usually bearish for gold.  The last time the Fed raised rates (17 times from 2004 to 2006), gold rose from under $400 to over $600.

Let’s also take a more detailed look at the Presidential election.  In the last week, Hillary Clinton has risen in the polls as Donald Trump has made more than his usual daily quota of gaffes in public, in recorded statements from the past and in his Twitter account. A Hillary Clinton victory is not as bullish for gold as a Trump victory, so gold tends to decline when it becomes more clear that Hillary Clinton will win.

However, there will always remain the outside chance that Donald Trump might win the election – now less than 30 days away.  That could super-charge the price of gold, very rapidly. In the last 45 years (since the dollar was completely taken off the gold standard in 1971), there have been two maverick Presidents coming from seemingly out of nowhere to win a close election.  Gold soared after both such events.

The Carter Gold Bull Market, 1976 to 1980

Jimmy Carter was Governor of Georgia from 1971 to 1975 but other than that, he had little experience to commend him as President.  He came from seemingly out of nowhere to win the Democratic nomination.

The Republican incumbent, President Gerald Ford, had far more national legislative experience (starting in Congress in 1949). No incumbent had lost an election since Herbert Hoover in 1932.  Ford was heavily favored to win until he uttered a gaffe on October 9, saying “there is no Soviet domination of eastern Europe, and there never will be under a Ford administration.”  That made the race far closer in the end.
Gold traded very low during that election campaign, assuming a Ford victory and more of the status quo.  Gold reached its 1976 low of $103.50 per ounce on August 25 and it closed August at $104.  The gold price remained under $115 per ounce until after Ford’s gaffe, but Ford was still expected to win, so gold stayed relatively low, at $122.50 on the day Jimmy Carter was elected.  The election was very close, with Ford winning 27 states to Carter’s 23. Carter won with 50.1% of the popular vote and 279 electoral votes.

After Carter’s narrow but surprising victory, gold shot immediately up to $139 in less than two weeks after Carter was elected.  Gold then reached new highs above $200 in late 1978 and then started soaring during Carter’s final 18 months in office, rising from under $300 in mid-1979 to over $800 in early 1980.

Gold Price Chart

The Carter (1976-80) and Obama I (2008-2012) Gold Bull Markets
Source: Wikipedia, “Gold as an Investment”

Gold’s rise was due to Carter’s inept economic policies.  America suffered under “stagflation” during his stewardship, including long gas lines, inflation and unemployment each above 10% and a Prime Rate over 20%.  Under Carter’s clueless policies, gold gained almost seven-fold during his administration.

The Gold Bull Market in Obama’s First Term

In a similar situation eight years ago, an untested one-term Senator whose only previous experience was in the Illinois State legislature and before that as a “community organizer,” Barack Obama suddenly swept into the lead in the Democratic Presidential sweepstakes, surpassing the favored Senator from New York, who was also widely credited as a “co-President” for eight years in the 1990s, Hillary Clinton.

Like Carter, Barack Obama was running against a long-time Washington insider, Senator John McCain, who (like Gerald Ford) could claim over 25 years of experience in Congress in Washington, DC.

The nation was undergoing a painful economic crisis in October of 2008, with the stock market careening downward.  Much to the surprise of most gold bugs, the price of gold was falling by similar percentages. October of 2008 was terrible month for gold, as its price fell over 20% from $905 on September 29 to $712.50 on October 24.  But gold soared to a record $1200 one year later and $1900 within three years.

The reason for gold’s massive rise in President Obama’s first term was his programs of deficit spending.  The federal budget deficit was over $1 trillion in each of his first four years in office – something that has never, ever, happened in any other years in American history.  His programs kept coming, starting with a $787 billion stimulus spending bill (American Recovery and Reinvestment Act of 2009), passed in his first month in office, followed by silly schemes like “cash for clunkers” during his first summer in office.

Until the Republicans took over control of Congress in early 2011, Obama’s spending plans were totally unchecked.  The divided government of 2011 led to a dramatic showdown in August of 2011 after Standard & Poor’s downgraded U.S. sovereign debt and the two warring branches of government threatened to close down the government over passing a new debt ceiling.  In September, gold peaked at prices over $1900 and then staying over $1500 per ounce 18 more months, through April of 2013.

The fiscal situation settled down somewhat in Obama’s second term, despite howls of outrage over the “fiscal cliff” and spending “sequestration.”  Cutting spending didn’t cause the “end of the world as we know it,” as the spending addicts warned us, so gold has settled down during Obama’s second term.

And now we face a possible repeat of the 1976 Carter surprise or the surge following Obama’s election with the possible election of another outsider maverick with little experience and lots of spending plans.

As the election nears, now would be a good time to take your position in gold – before November 8.