What Will Happen to Gold in a Very Slow Recovery?
Source: Julian Phillips, Gold Forecaster (9/7/10)
"Will economic recovery see a fall in the gold price?"
The 'better-than-expected' poor employment figures of last week were generally taken as a sign the recovery is there, but L-shaped with a slightly rising bias. The new stimuli from government will be positive and hitting where they should. Tax breaks on new equipment and infrastructural development tastes the same as digging holes and filling them did in the 1930s. We have to wait and see if the economy will respond. We sincerely hope it will. But do U.S. investors even believe a recovery will see a fall in the gold price? We think not!
The Future of the Dollar
We ask the question, will a recovery help the U.S. dollar? One of the factors that U.S. investors have looked at in the past, but which has broken down this year, is the belief that gold will rise if the dollar falls and vice versa. Cast your mind back to the pre-credit crunch time and what did we see?
The U.S. trade deficit was a regular +$60 billion a month because imports were cheaper than locally made goods and consumers bought imports. Consequently, over time, the dollar drifted lower. With U.S. consumers more thrifty now than they were then and buying cheap imports in place of local products, we expect the same to be true in a slow recovery. In fact, the trade deficit has already been rising faster than expected for this very reason. As Asia adds to its expertise over time by the quality of its goods, but not necessarily the price, it will rise and claim more market share than ever before. So, even in a slow recovery, expect a rising trade deficit. This is dollar negative.
What should be of great concern to all is the internationalization of the yuan. (Subscribers can access a related article through our archives or upon request.) Once this internationalization of the yuan has gained traction we will see the use of the USD in international trade decline fairly rapidly. The unused dollars will have nowhere to go except home. On the world's foreign exchanges, the result will be a decline in the dollar's exchange rate. Unless there is a structural change in import demand within the U.S., the U.S. will contribute to the USD's fall still. The only quick way out for the U.S. is protectionism, which will help stop this decline. However, this will bring a far greater level of instability and uncertainty in foreign exchanges than we see now. This will be extremely gold positive.
The Positive Impact of a Recovery on Gold
The overall impact of a recession, or even worse, is that the quantity of money shrinks even in the investment world. Yes, in that scene gold is sought out as a preserver of wealth; but perhaps not in such great volume as in an uncertain, unstable, recovering economy.
The shock of the last three years on the developed world could not have been greater as the U.S. economy and its position in the global economy reached its zenith, then buckled. In the years since, there has been a considerable metamorphosis in investment thinking. The rosy future has gone. The fact that any day could bring some more bad news, more uncertainty and more instability is firm in all of our minds. Consequently, prudence is taking a greater place as muted optimism in the investment world and investment strategies are adjusted accordingly.
As part of that new prudence, gold investments have found a solid place in successful portfolios. The strategy is to act as a counter to other poor-performing investments. As this attitude toward gold continues to grow, more and more investment managers are getting to know gold's value—even if they don't want it in their portfolios. More and more of those managers are turning from disliking gold, to liking it. This does not necessarily mean there is a steady drift by developed world investment managers into gold; but it does mean that, each time there is another shock to the monetary system and investment world, the speed and investment volumes with which investment managers turn to gold increases. So battered are we in the last three years by bad news that we are extremely sensitized to it and react quickly.
The benefits of even a slow recovery over a recession, as far as it concerns gold, is that greater volumes of investment funds will be available for investment in gold and gold-related products.
But a Very Slow Recovery
A rapid recovery would have fanned a positive attitude toward investments and could well have deflected U.S. investment managers from investing in gold. Even as the recovery struggles to take hold, current doubts about the recovery keep fear and uncertainty in place. The failure of the recovery to gain pace after so much has already been injected into the economy, has fanned uncertainty and increased cautionary investing policies. It is going to take far more than just unemployment figures that aren't as bad as expected to convince investors the recovery has taken hold. If current efforts by the Obama administration fail, it will be nearly impossible to convince the investing public that all is well in downtown USA.
Such a mood is internationally infectious and will spread globally. Should that happen, gold will accelerate its move to center stage in the investing world.
This is but one aspect of the world of gold. To get the full picture as it develops over time, subscribe to our newsletter: www.GoldForecaster.com.
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.