1. Economy
How bad can things get? Secretary of the Treasury Paulson talks of the current crisis being potentially worse than the Great Depression. Alan Greenspan told Congress that the financial meltdown had left him in a “state of shocked disbelief.” Reputable economists are saying “this looks an awful lot like the beginning of the second Great Depression.” U.S. consumer confidence has fallen more sharply than in any period since records began in 1978.
We have seen the nationalization of Fannie Mae, Freddie Mac and AIG; the socialization of the auto industry; the disappearance of the investment banking industry; a $700+ billion bailout with more to come; the bankruptcy of Lehman Brothers; the “breaking-of-the-buck” of the supposedly rock-solid money market funds; the largest bank failure in history; the implosion of global stock markets; the collapse of home values, retail sales and consumer sentiment; the biggest fall in industrial production in 34 years; and an unprecedented shattering of confidence in both commodities and financial assets.
2. Fear
As the market does its daily job of balancing fear and greed, it becomes increasingly apparent that fear predominates. Individual investors are abandoning anything with the slightest hint of risk. Last year was the worst year for global equity markets since the Great Depression with the Dow suffering its worst annual decline since 1931. Anything remotely risky or linked to the performance of the global economy was shunned. U.S. financial institutions are toppling like tenpins and confidence in those institutions has never been lower. Investors are pulling huge amounts of money from hedge funds, stock mutual funds and bond mutual funds in one of the biggest flights to safety the financial industry has ever seen.
3. Demand
The U.S. rate cut to virtually zero lowers the opportunity cost of buying gold. Gold is different from other precious metals such as platinum and palladium because the demand for these precious metals arises principally from their industrial applications. Gold’s value does not principally arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value and a safe haven. Other precious metals have also been classified as Defensive Assets, but have not performed as well as gold during this crisis. For example, investment accounts for about 90% of the demand for gold, while investment makes up only one-third of the total demand for platinum. Therefore, although gold has done well, platinum’s demand from industrial uses has fallen rapidly, particularly because of the high concentration of uses of platinum in new automobiles – an endangered species in an economy in which automakers are begging for funds from Washington just to keep them afloat.
4. Reflation
Gold benefits from the cure for deflation, rather than from deflation itself. At some point, the market is going to get over its concerns about deflation and become concerned about inflation – that will be the real inflection point for gold. In the past twelve months, the Federal Reserve’s balance sheet grew by 146%, the European central banks’ by 58%, the Swiss national banks by 74%, and the Bank of England’s by 158%. Huge amounts of money supply growth are now in the system and more is on the way. The Fed and central banks throughout the world are sending so much money sloshing through the system that they will eventually generate a bad case of inflation. While inflation isn’t overtly apparent today, stimulus packages and bailouts mean much more money in the system, which is classically inflationary. Historically low U.S. interest rates, U.S. dollar weakness, and the longer term inflationary pressures of the Federal Reserve throwing trillions of dollars at the U.S. economy make the environment favorable for gold and other tangible assets.
Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Gold rose 5.4% over 2008, ending the year above $850 a troy ounce. Gold bullion reached $1,030.80 in mid-March and Mints around the world ran out of popular gold coins and small gold bars after the collapse of Lehman Bros. in September. Now gold is back over $1,000 with a very high likelihood of it being a new floor. Because of the inflationary impact of the Bailouts, Merrill Lynch predicts that gold will hit $1500. Other analysts believe that $1500 is just the next floor, not the ceiling.
5. The Dollar
In the longer term, the dollar’s health remains dependent upon foreigners’ appetite for U.S. assets, which will decline as the economy falters and the government continues to inject additional liquidity. Now government is monetizing the debt through the Fed buying Treasuries on the open market. Many respected economists feel this action alone is the death throes of the currency. Dollar weakness, plentiful liquidity and policy reflation will be persistent themes over the next year or so. Massive fiscal and monetary stimulus have combined to weaken the dollar, but are expected to do so in an orderly fashion since no country wants a strong currency in a deflationary world.
Gold Prices
We were predicting an eventual breakout in gold prices once the dollar softened more decisively and once reflationary policies gain economic traction. Now that we have seen a breakout above $1,000.00 per ounce, it is a sure sign that U.S. monetary and fiscal policy is finally getting ahead of the deflation curve. Liquidity conditions will be easier and easier as the year progresses as part of the fight to support the economy and reduce deflationary pressures. Such conditions are consistent with higher gold prices and we expect to see gold prices exceed $1,500 by year-end.
All Things Considered, John’s Commentary…..
What action should you take? At some point you have to decide if you believe the argument above (and similar arguments by other authors) or not. Do you?
If you agree with the argument, have you taken action to build a position in gold and silver, or not? If you have not, don’t wait for prices to “fall back” to where they were. They are not going to – certainly in the long term (2-5 years from now). That is like the individuals in 1933 who had to wait until 1965 for their stocks to get back to their non-inflation adjusted prices. If you have taken action – you should strongly consider adding to your position. As I write this commentary, silver is a tremendous buy with virtually no downside.
If you don’t buy into the argument, that’s fine – do nothing. But what if you’re wrong? Simply, what if…? Stop and consider for a moment, why do you buy homeowners insurance? Do you plan on your house burning down with everything inside it? Of course not, yet we all would be foolish not to insure ourselves against that risk. You hope you never need the insurance, but you’re sure glad you have it if you do. One of the principal roles precious metals play is that of wealth insurance. You may think you don’t need it, but you’ll be glad you have it if you do!
If you just don’t want to worry about the possibility, or hope it just goes away – it won’t! Something is going to break – we can all feel it. No matter what side of the fence you are on, we all sense a turning point, a tipping point of some sort. If you choose to stick your head in the sand, you will get whatever you’re given when you eventually lift your head up. I don’t think you’ll like it! Are you willing to take that chance? – John Fisher
- Economy
How bad can things get? Secretary of the Treasury Paulson talks of the current crisis being potentially worse than the Great Depression. Alan Greenspan told Congress that the financial meltdown had left him in a “state of shocked disbelief.” Reputable economists are saying “this looks an awful lot like the beginning of the second Great Depression.” U.S. consumer confidence has fallen more sharply than in any period since records began in 1978.
We have seen the nationalization of Fannie Mae, Freddie Mac and AIG; the socialization of the auto industry; the disappearance of the investment banking industry; a $700+ billion bailout with more to come; the bankruptcy of Lehman Brothers; the “breaking-of-the-buck” of the supposedly rock-solid money market funds; the largest bank failure in history; the implosion of global stock markets; the collapse of home values, retail sales and consumer sentiment; the biggest fall in industrial production in 34 years; and an unprecedented shattering of confidence in both commodities and financial assets.
- Fear
As the market does its daily job of balancing fear and greed, it becomes increasingly apparent that fear predominates. Individual investors are abandoning anything with the slightest hint of risk. Last year was the worst year for global equity markets since the Great Depression with the Dow suffering its worst annual decline since 1931. Anything remotely risky or linked to the performance of the global economy was shunned. U.S. financial institutions are toppling like tenpins and confidence in those institutions has never been lower. Investors are pulling huge amounts of money from hedge funds, stock mutual funds and bond mutual funds in one of the biggest flights to safety the financial industry has ever seen.
- Demand
The U.S. rate cut to virtually zero lowers the opportunity cost of buying gold. Gold is different from other precious metals such as platinum and palladium because the demand for these precious metals arises principally from their industrial applications. Gold’s value does not principally arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value and a safe haven. Other precious metals have also been classified as Defensive Assets, but have not performed as well as gold during this crisis. For example, investment accounts for about 90% of the demand for gold, while investment makes up only one-third of the total demand for platinum. Therefore, although gold has done well, platinum’s demand from industrial uses has fallen rapidly, particularly because of the high concentration of uses of platinum in new automobiles – an endangered species in an economy in which automakers are begging for funds from Washington just to keep them afloat.
- Reflation
Gold benefits from the cure for deflation, rather than from deflation itself. At some point, the market is going to get over its concerns about deflation and become concerned about inflation – that will be the real inflection point for gold. In the past twelve months, the Federal Reserve’s balance sheet grew by 146%, the European central banks’ by 58%, the Swiss national banks by 74%, and the Bank of England’s by 158%. Huge amounts of money supply growth are now in the system and more is on the way. The Fed and central banks throughout the world are sending so much money sloshing through the system that they will eventually generate a bad case of inflation. While inflation isn’t overtly apparent today, stimulus packages and bailouts mean much more money in the system, which is classically inflationary. Historically low U.S. interest rates, U.S. dollar weakness, and the longer term inflationary pressures of the Federal Reserve throwing trillions of dollars at the U.S. economy make the environment favorable for gold and other tangible assets.
Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Gold rose 5.4% over 2008, ending the year above $850 a troy ounce. Gold bullion reached $1,030.80 in mid-March and Mints around the world ran out of popular gold coins and small gold bars after the collapse of Lehman Bros. in September. Now gold is back over $1,000 with a very high likelihood of it being a new floor. Because of the inflationary impact of the Bailouts, Merrill Lynch predicts that gold will hit $1500. Other analysts believe that $1500 is just the next floor, not the ceiling.
- The Dollar
In the longer term, the dollar’s health remains dependent upon foreigners’ appetite for U.S. assets, which will decline as the economy falters and the government continues to inject additional liquidity. Now government is monetizing the debt through the Fed buying Treasuries on the open market. Many respected economists feel this action alone is the death throes of the currency. Dollar weakness, plentiful liquidity and policy reflation will be persistent themes over the next year or so. Massive fiscal and monetary stimulus have combined to weaken the dollar, but are expected to do so in an orderly fashion since no country wants a strong currency in a deflationary world.
Gold Prices
We were predicting an eventual breakout in gold prices once the dollar softened more decisively and once reflationary policies gain economic traction. Now that we have seen a breakout above $1,000.00 per ounce, it is a sure sign that U.S. monetary and fiscal policy is finally getting ahead of the deflation curve. Liquidity conditions will be easier and easier as the year progresses as part of the fight to support the economy and reduce deflationary pressures. Such conditions are consistent with higher gold prices and we expect to see gold prices exceed $1,500 by year-end.
All Things Considered, John’s Commentary…..
What action should you take? At some point you have to decide if you believe the argument above (and similar arguments by other authors) or not. Do you?
If you agree with the argument, have you taken action to build a position in gold and silver, or not? If you have not, don’t wait for prices to “fall back” to where they were. They are not going to – certainly in the long term (2-5 years from now). That is like the individuals in 1933 who had to wait until 1965 for their stocks to get back to their non-inflation adjusted prices. If you have taken action – you should strongly consider adding to your position. As I write this commentary, silver is a tremendous buy with virtually no downside.
If you don’t buy into the argument, that’s fine – do nothing. But what if you’re wrong? Simply, what if…? Stop and consider for a moment, why do you buy homeowners insurance? Do you plan on your house burning down with everything inside it? Of course not, yet we all would be foolish not to insure ourselves against that risk. You hope you never need the insurance, but you’re sure glad you have it if you do. One of the principal roles precious metals play is that of wealth insurance. You may think you don’t need it, but you’ll be glad you have it if you do!
If you just don’t want to worry about the possibility, or hope it just goes away – it won’t! Something is going to break – we can all feel it. No matter what side of the fence you are on, we all sense a turning point, a tipping point of some sort. If you choose to stick your head in the sand, you will get whatever you’re given when you eventually lift your head up. I don’t think you’ll like it! Are you willing to take that chance? – John Fisher
