economic news
We’ve been hit with a barrage of good economic news lately
, but it has so far only managed to temper investors’ enthusiasm of equities rather than scuttle them altogether
. Stocks actually managed to put in a decent reversal yesterday after falling to 1
,040 on the S&P 500 and less than 10
,000 on the Dow Industrials
. Most likely we’ll rally a bit more, but chances are we’ll soon revisit and, indeed, trade below yesterday’s nadir
. As more bad news gets digested
, however
, we’ll move closer to the Federal Reserve stepping in with additional quantitative easing
, buying up bonds on the open market to put cash into the system
. News of this is likely to ignite a powerful stock market rally; it’s just a question of from what level on the S&P and Dow it will occur
. The bond market is certainly worried about where we’re headed
. In late 2008 – early 2009 when yields were as low as they are today
, the S&P was 200 points or about 20 percent lower that it is today
. A weak economy and declining corporate profit expectations suggest we’ll surrender at least a portion of that difference at some point
. Traders will be scrutinizing tomorrow’s GDP report as well as a policy speech from Fed Chair Ben Bernanke for clues as to where we’re headed and how soon the central bankers will act
. One thing’s for sure
, while we’re in a deflationary environment right now
, more money printing will ultimately be inflationary
. No surprise then that gold continues to display impressive relative strength and is just below record highs
. It’s not just Americans that are finding comfort in owning gold
. The World Gold Council yesterday released its quarterly report on gold demand
. Worldwide demand in the second quarter rose 36 percent to 1
,500 metric tons
. Leading the charge was investment demand
, with China among the strongest investment markets
, where retail demand rose by 121 percent to 37.7 tons in the period. This is a trend that should persist for years to come—and the supply of newly mined gold isn’t likely to keep pace. The Chinese government actively encourages its citizens to buy gold as a means of channeling savings into investments
. They go so far as to run ads on television extolling the virtues of owning the metal
. Anyone can walk into a Chinese bank and purchase gold (at a smaller premium than what we pay here) and the metal can conveniently be stored at the same bank
. There’s a solid rationale behind China’s gold strategy
, in contrast to no such strategy here in the US. For China
, the bigger its position in gold the more likely it will be to acquire the resources it desperately needs to develop
. Equally important
, the more gold its citizens own the greater the control the government has over its citizens’ wealth and wellbeing
. China’s sizeable and growing gold horde may at some point be used to back up the yuan
. They’re not there yet
, but in light of the debasement that’s taking place in the dollar
, the euro and the yen
, we suspect the Chinese are angling to establish a gold-backed yuan
. In other words, the Chinese would be able to say that you can exchange one yuan for a certain amount of gold (which, of course, would be less than the then current value of the yuan)
. This in turn would make the yuan a close substitute for gold
. In a world of growing resource scarcity owning gold is as close as you come to controlling your fate. At $1
,240 an ounce gold is downright cheap
, even after a decade of outperforming other asset categories
. A year or two from now
, with inflation again heating up, today’s price is likely to be a distant memory and your investment account the better for it
. And if you’re skeptical about the prospect for inflation given today’s deflationary backdrop
, keep in mind that this inflation will be driven not by our own growth
, but by growth in emerging economies in the context of increasing resource scarcity
. So we could paradoxically be faced with asset (real estate) deflation and materials inflation simultaneously
. That not a pretty picture
, but it’s the likely scenario we’ll be faced with and our various metals investments will leave us in good stead should it come to pass
.