The prevailing wisdom currently on Wall Street is that
gold and commodity stocks will go nowhere next year because interest rates are
about to rise in real terms. For instance, last week Goldman Sachs cut its
12-month gold-price forecast by 7.2%. The precious metal "is near an
inflection point," according to the firm. And while the metal may rally
slightly in 2013, a growing U.S. economy and a gradual rise in real interest
rates may send investors towards other investments, their analysts said.
The consensus is that the global economy will rebound
in 2013; causing central bankers in Europe and the U.S. to raise the cost of
borrowing faster than what the rate of inflation is increasing. However, not
only is the global economy not going to find its footing next year but
central bankers are going to slam their gas pedals through the floor; sending
interest rates yet lower in real terms.
In Euroland, ECB President
Mario Draghi said this week that they discussed
providing negative deposit rates (in other words, charging banks to hold
money at the ECB) and that there was also "wide discussion" of a
rate cut at their December meeting. The central bank also cut its growth
estimate for next year, predicting the economy will contract by 0.3% in 2013.
Why is Mr. Draghi so gloomy? Perhaps it is because
Eurozone manufacturing shrank for the 10th consecutive month; Spain now has a
record 4.9 million people unemployed and a youth unemployment rate of 50%;
Greek unemployment jumped to 26% in September, which is up from 18.9% a year
ago; and because the Eurozone unemployment rate hit a record 11.7% in
October. That doesn't sound much like an environment where the ECB is about
to take interest rates above the rate of inflation.
Turning to the Fed, operation twist is about to end in
the U.S., which will cause Mr. Bernanke to conduct unsterilized purchases of
MBS and Treasuries in the amount of $85 billion each month. Why is the Fed
chairman ready to sabotage the U.S. dollar to an even greater degree next
year than he did in 2012? Because the condition of labor in the United States
is still abysmal. The November NFP report showed that this most crucial part of
consumer's health is far from viability.
Despite a somewhat rosy top-line number of 146k net new
jobs, the data underneath the headline tells Bernanke that his free-money
interest rate policy must remain in effect for many years to come. And that
new measures to boost money supply growth will be pursued.
First off, the goods-producing sector of the economy
lost another 22k jobs. This shows that whatever job creation there was last
month will result in the promotion of those sectors of the economy that encourage
consumer's addictions to borrowing and spending; not from the sectors that
increase production and real wealth. Secondly, the Labor Force Participation
Rate fell to 63.6% in November, from 66% at the start of the Great Recession.
The Participation Rate was also down from the November of 2011 level.
Likewise, the Employment to Population Ration fell to 58.7%, from 62.7% in
December of 2007. This number also showed no improvement from the year ago
Of course, some will say the fall in the number of
people working and looking for work as a share of the non-institutionalized
population is the result of aging demographics in the United States. However,
those peak earners who are between 25 and 54 years old also saw their
participation rate decline from 82.9% in 2007, to 81.1% today. This crucial
number is also down from last year's reading of 81.3%. The bottom line here
is people are leaving the workforce because they cannot find adequate
employment opportunities; not because they have chosen to retire.
In November there were 2.5 million persons marginally
attached to the labor force, which is essentially unchanged from a year
earlier. These individuals were not included in the labor force because they
had not searched for work in the 4 weeks preceding the survey. Also, there
were 4.78 million people who have been out of work for at least 27 weeks in
last month's survey. This is Bernanke's worst fear and will ensure the Fed
will officially launch QE IV at the FOMC meeting next week.
If interest rates rise next year it will be because the
free market is taking nominal rates higher in an effort to keep up with
inflation. It will not be due to central banks getting ahead of money supply
growth rates. Therefore, the primary reason behind the twelve-year boom in
commodities will remain intact. Negative real interest rates caused the price
of gold to increase from $250 per ounce in 2001, to $1,700 today. I expect
real interest rates to fall next year, albeit at a lower rate of change than
in the latter portion of the last decade, so don't expect gold to surge like
it did in the 2000s. But rising prices, increasing money supply growth and
falling real interest rates should be falling enough to push gold prices to
new nominal highs in 2013; and that is why Goldman Sachs is completely wrong
on their call.