The primary result of the Republican victory will be to convince President Bush that when push comes to shove the voters back him and his programs. This will certainly result in his increased enthusiasm for all those initiatives and programs that have been the cornerstone of his administration.

1. The US Current Account must be in a Deficit position and growing. Yes, this is a present condition and shows no fundamental signs of reversing for a significant time. This is the account that measures the amount of US dollars in the hands of non-US entities. It is usually invested primarily in US Federal Debt instruments.



2. An intact negative trend in the US Dollar overall must exist. It should have the characteristics of a bear market. This is in fact true for the US Dollar today. We have a classic long-term top called a Head & Shoulders formation, which was subsequently confirmed by price and volume action. Even the dollar bulls now are looking only for the dollar to stabilize at lower levels. This criterion is in place for a long-term bull market in gold.



3. The general commodity market is showing in many ways, both fundamentally and technically, that it is in a base formation from which one can expect higher prices. We shall discuss the technical characteristics further to sustain that this ingredient has begun to support gold over the long term.



4. Trust in paper assets must be waning for gold to assume an investment role internationally. We see the recent decision against Andersen, the comments on GE & IBM accounting practices and Enron as examples of causative items, which have turned investors away from the absolute belief, in existence from 1980 until now, that paper assets were storehouses of value. We believe this ingredient is in favor of gold's long-term bull market.



5. The momentum in the appreciation of the bond market must be decelerating. We see this ingredient as positive now to a long-term bull market in gold.

Federal Reserve Chairmanship:
Because for President Bush, the next political event is his re-election, you can be sure that the nomination of the next Fed Chairman will be one that favors expansionary monetary policy. Be assured now that any chance of a conservative approach to the threat of deflation is a non-starter. Monetary aggregates will expand until the dollar bursts in search of increased economic activity. This then rates as a plus for gold. This increases the 2^nd Fundamental Element, an intact negative trend in the US dollar. It also affects the 3^rd Fundamental Element, a recognized bull market in general commodities, because the increased liquidity from increasing monetary aggregates will seek a home, not so much in equities but in commodities, hard & soft.

Budgetary Consideration:
At present (and previously) Republican control of both legislative bodies, budgetary momentum was in the direction of more spending and more taxes. This has been a compromise between the perceived need for economic stimulus and concern for the growth in the budget deficit. Clearly Republican choice would be for not taxing those at the top of the capitalist feeding chain and taxing the man behind the tree. However when there exists, as now, a big business and political necessity for economic stimulation, the tendency of the Republican mind is toward lower taxes for all. This means increased growth in the budget deficit as political and economic necessity calls. That means higher demand for money by the Federal Government. And possibly rebirth of the long (30-year) Treasury financing. This is positive to gold, as it is negative for bonds. That affects the 5^th element of a long-term gold bull market, probably reinforcing the recent high at 115 32/64 as the ultimate top of the long term bond futures market. This in all probability, along with the US Current Account deficit, will assure that the 5^th element for a long-term bull market for gold is now clearly in for the bond market, ie a long-term bond bear market.

Taxes:
You can now be assured that the temporary tax reductions scheduled to die on certain future dates will not evaporate on those days. More than this, a zero capital gains tax will be a quiet private carrot that will be hung out in front of the big money as the coffers get filled for the next presidential elections. All this means more Federal money demand and less Federal income in the next two to six years. In the environment of a large US budget deficit, a declining dollar and higher monetary aggregates, the tendency is to expand the US Current Account deficit. This is a positive key for a long-term gold-market.

Element #1: A Growing deficit in US Current Account above 5% of GDP
Element #2: An intact recognized negative trend in the US dollar.
Element #4: A declining confidence in paper assets as long-term storehouses of value.

General Legislative Implications:
Homeland Security is a shoo-in = Increased spending. The Energy Bill = Looks as if will pass. Don't look for cheap oil. Committee Chairmanships = The White House gains more strength.

Major Geo-Political & Economic Implications:
Iraq is in deep trouble. North Korea should not embarrass the President again. The Tariff war is still on.

Further polarization from the Islamic world is guaranteed. Continued US dollar weakness is probable. The current US stock market rally is at best a bear market event. A military action in Iraq becomes more probable. Therefore the Gold Dinar is closer rather than further way.

Conclusion: Nothing happened in this election to make the case for gold weaker. To the contrary, the sum of the events increases the probability that we are in a long-term gold bull market. This is because the events, in our opinion, give greater foundation to the probability that the (til now fundamentally missing) 5^th element, a long-term bear market for long rates, is in. That would be certain if assuming a top in the long US Treasury bond at 115 32/64 on the Futures.

We have just received the announcement of a ½ percent drop by the Federal Reserve in the key-lending rate. We feel this falls in completely with our analysis of the political impact of the Republican victory. As we said before, this Administration will burn the barn down before accepting the political implications of deflation. The barn is the US dollar. The War on deflation is well on its way, monetarily.

8 November 2002

James Sinclair can be reached at www.tanrange.com
and Harry Schultz at www.hsletter.com