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The Obama Initiative that Could Push Gold to New Heights

Posts by Ian Wyatt

President Obama gave his State of the Union address last week, outlining his plan for his second term in office.

Repairing more roads and bridges, passing stricter gun-control laws and – once again – reducing the budget deficit were among the many themes Obama touched on in his speech. A few of those initiatives have wide-ranging ramifications for investors, and my colleague Tyler Laundon deftly touched on some of them in his article on “How to Invest after the State of the Union Address” last week.

But one proposal in particular captured my attention – and it should be music to every commodity investor’s ears.

The president proposed raising the federal minimum wage for the first time in nearly four years. Minimum wage currently sits at $7.25 an hour; Obama wants to bump it up to $9 per hour.

How does that impact commodity investors? Because recent minimum wage hikes have had a profound impact on the price of gold.

The last three times the federal minimum wage was raised, gold prices have risen by an average of 15% in the months that followed.

Consider:

  • On July 24, 2009, minimum wage was raised to $7.25 from $6.55. Gold prices shot up 28% in the next four months.
  • On July 24, 2008, minimum wage was raised to $6.55 from $5.85. Gold prices sank 3.8% by year’s end. On the surface, that looks bad – but not when you consider that this was the height of the recession and stocks were in an all-out tailspin. The S&P 500 plummeted more than 25% during that same time period.
  • On July 24, 2007, minimum wage was raised to $5.85 from $5.15. Gold prices advanced 21% by year’s end.

The reason for the correlation between the price of gold and the cost of minimum wage is unclear. One theory is that minimum wage increases are inflationary, and thus further devalue the dollar – which typically moves inversely to the price of gold.

Regardless of the reason, this type of correlation is hard to ignore if you’re a commodity investor – especially with gold down 5% in the last year. At $1,610  an ounce entering the day, gold is the cheapest it’s been since mid-August. That creates a nice buying opportunity for the yellow metal.

Should Obama follow through on his minimum wage promise, $1,610 an ounce may seem dirt cheap by this time next year.