The Politics of Gold Investment

by Peter Schiff
Nov. 03, 2011

I think I know some lab mice that have received less examination than the 2012 Republican primary candidates. It seems with each passing cycle, the campaigning starts earlier, there are more debates, and the media frenzy gets more intense. Yet, with all the pyrotechnics and pageantry, it becomes difficult to figure out what these tricksters actually think when they're behind the curtain. Since the gold price is inextricably linked to the long-term fate of the US dollar, it's rather important for gold investors to be able to forecast how each candidate, if elected, would conduct his/her monetary policy.

Monetary policy is not nearly discussed enough in debates or television appearances – partly because too few viewers care about it, and partly because most candidates simply don't understand the subject. The most common monetary policy platform amounts to little more than, "I'm opposed to China's currency manipulation, and America needs a strong dollar!" (Little do they know that these two goals are right now in opposition.)

As we examine three frontrunners, it's important to remember that their future policies can be difficult to distil, but that their past records are likely to be a more effective indicator than their present rhetoric.

HERMAN CAIN: THE FED CHAIRMAN

Cain's lucky he's known as "The Guy Who Makes Pizza" instead of "The Guy Who Prints Money."

Herman Cain was Chairman of the Federal Reserve Bank of Kansas City from '95-'96, and held the positions of Deputy Chairman and Board Member during the preceding six years. This was the heyday of Alan Greenspan's bubble economy, and there is little record of Cain dissenting. While some have remarked that Cain knew little about economics when he joined the board, he has had ample time to learn. Yet, when challenged to name his favorite Fed Chairman at this year's debates, Cain still chose Greenspan!

Cain's flagship "9-9-9 Tax Plan" is drawing headlines, but it contains no in-depth discussion of monetary policy, other than brief allusions to a "strong dollar." No mention of quantitative easing or the money supply. No condemnation of artificially-low interest rates.

Even if Cain were able to reduce taxes considerably, the spending would continue. Like many Republicans, Cain talks generally about spending cuts, but does not specifically target any budget items. We can assume any actual cuts he gets through Congress would be of the "slow the growth of future spending" variety.

With continued spending and record of inflation tolerance, Cain will most likely turn to the Fed to monetize the extra debt. This means a Cain presidency is likely to be very bullish for gold – with the mitigating factor that if given free reign, Cain might at least try to move the country back on a sustainable path.

Cain Presidency:

Bullish for gold
Bearish for USD

MITT ROMNEY: THE CLOSET DEMOCRAT

Consider the following quote: "My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people. So action had to be taken."

It sounds like Tim Geithner, Ben Bernanke, or Paul Krugman. President Obama himself has said exactly the same thing countless times. Yet, this quote comes from Mitt Romney at a recent Republican debate.

Romney supported the TARP bailouts. Romney defends the Federal Reserve. Romney even implemented socialized medicine as Governor of Massachusetts. He says he would conduct monetary and fiscal policy "differently" than Obama, but when you're car is headed over a cliff, it doesn't much matter whether you drive on the right or left side of the road!

Just as with Cain, Romney still does not understand the terrible precedent set by the bailouts, and the devastating consequences loose monetary policy has on the US dollar and global economy. Worse yet, Romney hasn't even offered a credible plan to reduce government involvement in the economy. Romney's campaign slogan might as well be, "A New Face for the Status Quo." And the status quo is a collapsing dollar and skyrocketing gold.

Romney Presidency:

Very bullish for gold
Very bearish for USD

RON PAUL: THE GOLD STANDARD

If Ron Paul were elected President, he would immediately move to cut spending drastically. This is clear based on his 35-year record of acting on his promises, and his recent campaign pledge to cut $1 trillion from his first proposed budget. He would face stiff resistance from both parties, for sure, but such a move would change the entire direction of public discourse.

Now, it's important to remember that $1 trillion is only two-thirds of the 2011 deficit. So, even if President Paul got his entire budget approved, we still would be facing a growing debt of around $16 trillion at that point. While President Paul could order the Treasury to begin selling its toxic assets that are impeding economic recovery, he wouldn't have direct control over the Fed – which, under Bernanke, would likely announce even more money-printing to counteract the President's tough medicine.

But President Paul's real silver bullet would come two years into his term when he would get the opportunity to nominate a new Fed Chairman. As someone who entered public life in response to the end of the gold standard under Nixon, Paul is certain to appoint the most hawkish Fed Chairman the country has ever seen. This would immediately reverse the misfortunes of the US dollar and could impact gold's rise.

But remember, even in this pie-in-the-sky scenario, it will still take years for Bernanke's devaluation damage to fully circulate around the global economy. That means gold could still appreciate well into a Paul presidency.

Ultimately, a Paul presidency could also lead toward a gold standard monetary system. In such a case, gold is likely to carry an even higher value as the premium for serving as the international reserve asset.

Paul Presidency:

Bullish for gold
Bullish for USD

RICK PERRY: THE BIG SPENDER

Rick Perry is a career politician now in his 11th year as Governor of Texas. He claims to be a tax-fighter, but he has signed several tax increases as Governor. To the extent that he has held the line on taxes, he's overseen a more than doubling of Texas state debt. And not all of this money was going to pay for schools and roads. For instance, he created the $435 million Texas Enterprise Fund to subsidize politically connected businesses.

As a candidate, Perry has adopted Ron Paul's rhetoric being critical of the Fed's quantitative easing programs. He's even gone as far as accusing Bernanke of "treason." But he doesn't show a deep understanding of what makes the Fed's policies so destructive, and his campaign website makes no mention of monetary policy at all.

Still, Perry at least knows which way the wind is blowing, and he does have a record of vetoing expensive legislation. Overall, it's hard to tell what kind of President he would be – a lot like it was for the last Texas Governor that become President. In the latter case, President George W. Bush claimed to be for small government and a humble foreign policy, but went the exact opposite way once elected.

Perry might make an attempt to change Washington's direction, but he has neither the depth nor the steadfastness to really make it happen. Thus, the current gold/dollar dynamic would be likely to continue.

Perry Presidency:

Bullish for gold
Bearish for USD

NEWT GINGRICH: THE BENEDICT ARNOLD

In the mid-'90s, Newt Gingrich gained a reputation as a radical reformer after he led the Republicans to their first House majority in 40 years. He wrote a Contract with America, and made a good faith attempt to pass all of its provisions. This movement could be credited with stopping Hillarycare, enacting welfare reform, and reducing certain key taxes.

But in the years since, he has vocally supported programs like the costly Medicare Part D, teamed up with Hillary Clinton on healthcare, and supported mainstream Republican candidates over Tea Party challengers.

What happened? Clearly, Gingrich has been building bridges in order to be seen as a moderate candidate for his Presidential run.

If only he had kept to his original firebrand style, he might have had a shot at getting something done in the White House. Unfortunately, trying to become part of the establishment is a game with no end, and therefore Gingrich is likely to continue "reaching across the aisle" to author costly legislation. If he announces a Contract with Austerity, maybe I'll change my tune.

Gingrich Presidency:

Bullish for gold
Very bearish for USD

HOW IMPORTANT IS THE PRESIDENT?

Despite what the media would have you believe, the President is not all-powerful. In fact, a President only has limited powers compared to Congress. Without the support of Congress and the American People, a President can be rendered a lame duck early on – like Jimmy Carter was.

The direction of gold under most candidates is fairly easy to predict – it will continue appreciating against the falling US dollar. This is simply because these candidates will not even attempt to address the disastrous fiscal and monetary policies that have brought us to this point.

The price direction under Ron Paul (and also Gary Johnson), however, would be less predictable. I believe both men would try their best to reverse the US decline that my strategy is insulating against.

In any case, even an authentic campaigner who understood the calamities of money-printing would be hard-pressed to actually save the dollar at this point. The history of fiat currencies has few – if any – examples of monetary debasement being reversed before the currency falls apart – and many cases of gold proving the superior asset.

BARACK OBAMA: THE WORST-CASE SCENARIO

There is one candidate in 2012 that we can be sure won't even try to save the dollar, and that is President Obama. From his doubling down on the bailouts to his faithful support of Chairman Bernanke, Obama has done almost everything in a President's power to hasten the dollar's demise.

If he is re-elected, which still seems like a possibility, then you better put on your mining hats because the gold rush is on!
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Peter Schiff CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. He is author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is How an Economy Grows and Why It Crashes.