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The Bullion Report

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January 5, 2011 in 'The Bullion Report'

Digging a HoleDigging a Hole

1-5-11

Digging a Hole


The new trading year brought renewed enthusiasm for global recovery. It also delivered a fresh round of selling in precious metals. Optimistic reports on manufacturing as well as positive bank news helped things along. There is no doubt that this inspires a new trajectory towards recovery, but are investors out of the gate prematurely?

Remember where it all started

A simplified view of the events of the last few years would start with a housing bubble. Prices got higher and higher, more homes were built, people took mortgages they couldn’t afford, and eventually things fell apart. The ripple effect was incredible. Is all of that really behind us? It doesn’t seem to be. Home sales and construction can post better results, but they are coming off of some of the deepest plunges seen in years. Those deep plunges sparked layoffs and job losses of a magnitude that begged comparison with the Great Depression. Areas with the greatest employment issues included construction and mortgages, only partially mended with a rise in commercial building. Can those extra opportunities that came during the housing boom ever truly be recovered?

The key to any spark of recovery has rested on clearing the books of the bad debt and trying to kick start economies. Banks and officials have tried to rework faulty mortgages and maneuver around bad debt. Some credit issues and foreclosures remain. There might still be troubles out there, waiting to come home to roost.

Employment has been among the biggest issues to contend with. The first reading of the job situation for 2011 is an important highlight. However, temporary jobs from the holidays and the potential for continuing underemployment for many can easily cloud the picture. There have been a few companies looking to add employees, but the job hunt still appears to be long and fierce for many out-of-work people. Part of the promise for stimulus since the beginning of the crisis has been job creation. The growth in the job sector just seems to be lagging a little further behind what is comfortable. Benefits may have been extended for some claimants, but those actual dollar amounts being paid to unemployed people might not be at a level which sustains lifestyle and spending habits. The fallout from that had an obvious impact on the retail sector.

This sector has just wrapped up its annual holiday period, and the level of consumer spending during the season will be key this month. Did consumers feel confident enough to ante up for more presents than in years past or were they frugal again? Were they taking advantage of slashed prices and adding impulse items to their carts? Were they throwing caution to the wind on hopes that there really is a recovery? Improved buying habits might be enough to stimulate another move higher, at least until something forces people to tighten their belts again.

A catalyst for that might not be far enough in the economic rearview. Starting a fresh, new year didn’t diminish the very real concerns that global money supply will eventually create an inflation situation. Very large sums of cash have been printed and doled out in an effort to “stimulate” the economies of Western countries. This large supply of money has been cited by media from many places, including the World Gold Council, as a potential catalyst for “future inflation pressures.” The quantitative easing programs from the Federal Reserve ignited another discourse on that subject.

The latest meeting minutes from the Fed suggests little concern over inflation and a focus on maintaining low interest rates. This seems contrary to the global scene which appears to have plenty of inflation fears, certainly where food is concerned. Forecasts for higher energy prices have also lit up headlines.

The more money is printed, and the more debt is accrued in an effort to try to repair the damage, the harder it might be to find solid ground. There is significant discomfort regarding the amount of printed money. Even global bank leaders came out to criticize QE2 when it was announced. How long can this kind of response be sustained?

Summary

Is the fresh start to the year delivering a false start for investors or will this be the beginning of a downtrend in bullion? It looks very much like betting on vapors at the moment. Cementing a recovery and sustaining growth is a key component that feels like it is still missing. The inflation hedge demand for precious metals will likely keep strong support in these markets. This might suggest that the recent dip will be seen as a long entry point. There certainly appears to be enough evidence that the money supply is blossoming, and less compelling evidence that things are under control. The trick will be in determining if the global economy is climbing out of one deep hole, just to dive into another, larger hole.

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You can't have inflation without somebody artificially creating money and credit out of thin air. Ron Paul


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.