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Again
this week, the minutes of the Fed's meeting gave cause for concern as they
stated that the risks to the U.S. economy had moved to the downside. While
this cannot be read as a forecast of the 'double-dip' recession, it moves it
from possible to probable in our eyes. With the U.S. and developed world [excluding
Asia] supposedly on the path to recovery, it has been very "L"
shaped. It is at that sensitive stage where it needs people to believe that
it will get better and become supportive through spending and buying again.
If the consumer, businesses and banks believe that may be postponed or even
return to recession we are likely to see spending and buying slow quickly, so
bringing on the recession. On the other side of the coin, what if the
recovery does gain traction and the U.S. economy booms again, will that be
bad for gold and silver?
Is a Recovery Bad for Gold?
There appears to
be a misconception that a recovery will be bad for gold. Indeed Goldman Sachs
indicated gold will continue to rise, but should the recovery gain momentum,
it will be bad for gold. We could not disagree more strongly. To add
substance to this statement, we ask you to look back to pre-credit crunch
days and the seven years that preceded that. In these boom years did gold
fall or even hold steady at a range-bound price? No. These were the years
when it rose five fold. These were the years when the U.S. economy boomed and
ran a persistent Trade deficit that saw the U.S. $ weaken from $1: €1
to $1: €1.5. These were the years that saw oil peak at $145 a barrel
and the years that saw China climb onto the world stage.
Is a Recession Bad for Gold?
After August
2007, gold and silver pulled back as investors de-leveraged. Once these
over-geared investors had left the market the gold price recovered from $960
to the present levels and held there while the developed world economy
stabilized.
And now?
What is the scene
now? If the U.S. and European economies recover, will less oil be used? Will
less Dollars flow out of the States in the Trade deficit [that is already
climbing]. Will China shrink? Will the memory of all that took place in 2007
go away and leave consumers again blissfully spending as though there is no
tomorrow and credit is endless?
A New Reality
Since 2007, many,
many structural faults were exposed in the global economy and have sensitized
everybody to the dangers we face on so many fronts, such as exchange rates,
relying on consumers for growth, insufficient oil to supply a far larger and
still burgeoning China alongside a growing, developed world. Add to that, key
exchange rates that are so volatile they can move several percent within a
week. Add to that, the possibility that quantitative easing may need to be
turned on again to increase much further the quantity of money out there.
Worse still, the banking crisis that started the crisis has morphed into a
Sovereign Debt crisis that has put the lender's of last resort in a
confidence crisis and along with that fears for the survival of the Euro.
A new recession
on top of all of that together with more quantitative easing is unlikely to
spawn the hope that it did first time round. The crisis to date has vastly
altered all of our perceptions, adding a good degree of skepticism to the
repeat of the past rescue measures. We have to ask, would they be reinforcing
failure?
The Economic Future
So what lies
ahead now? A boom or a bust! Either way our fears remain. The future points
to more crises and those on an already weakened world. In fact the 'bust' we
are still experiencing has probably saved the developed world from a bigger
one. The time it has taken, to date, should have been used to: -
- Vastly
extend oil resources to accommodate a recovered developed world
alongside a developed China.
- It should
have introduced the Yuan to global trade next to the U.S. $ so as to
produce a stabilized currency scene.
- It should
have reformed to allow the ground level businesses of the developed
world to thrive, so lifting the major institution and governments back
to health.
- As the
developed world returned to profitability from top to bottom [not just
at the top] tax revenues would have swollen to cope with budget
deficits.
- In turn it
should have seen a start to debt reduction, so that budget deficits did
not pose major threats to the monetary system.
Structural Repairs
Has this
happened? Instead the aim of central banks and government appears to be to
get back to where we were in August 2007, when the crisis first struck. To
blame the banks for it all is unreasonable. Maybe they do deserve to
be accused, but to turn them into the only scapegoats is not fair.
Consumerism was out of hand, house prices were way over the top, the
developed world lived with the attitude, "Live now, pay later".
Everybody was to 'blame'. Has the time passed been used to change attitudes?
Look at China and ask why they are developing so strongly from the ground up?
The point we are
making here is that recovery is only a small part of the solution. The other
steps to developed world economic health have not been taken. Structural
faults are now, not only exposed, but threatening new fractures. With China's
power and wealth increasing, in part, at the expense of the developed world
new pressures are being added to the developed world all the time.
Structural
repairs are not fully on the agenda of developed world authorities, so we
must experience more fractures as a result.
Threats to the U.S. Dollar as the Sole Reserve currency
What if Chinese
goods were priced only in the Yuan? What if they only accepted the U.S.
Dollar for U.S. trade? What if the oil price were priced in the main
currencies of the world, not just the U.S. Dollar? This has to happen in
time, should China continue to develop at the present rate.
Against the
backdrop we have just described, does it seem likely that we are near the
peak of the gold price? Gold is the thermometer of the monetary world. Would
you say the temperature is still rising? Do you see a, "and they lived
happily ever after" picture in two years time? So what does lie ahead
for gold and by extension silver? How long will the bull market run for
still? Is it simply a 'bull market? We talk of that in our newsletter, at
length.
Julian
D. W. Phillips
Gold/Silver Forecaster
– Global Watch
GoldForecaster.com
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you to
do so professionally and within the law. Please contact us for any help
regarding this at: gold-authenticmoney@iafrica.com.
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