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The Bullion Report

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June 15, 2011 in 'The Bullion Report'

Shakier FoundationsShakier Foundations

It is starting to feel like a lifetime ago that the government and the Federal Reserve were confidently declaring that recovery was underway. They saw an increase in manufacturing activity and the potential for stimulus dollars to improve the jobs outlook. That kind of talk quickly evaporated; and even though some people still pay lip service to the idea of recovery, I believe that if there is one building it is on an incredibly shaky foundation. This instability is building a significant amount of fear in investors, and another potential level of support for gold and silver. 

 

 

Past performance is not indicative of future results.
***chart courtesy of Gecko Software

There are a few key things to consider with regards to an economic recovery. The first, and I think the most important, is the sustainability of any positive data that the market receives. Sure, there were reports that manufacturing activity was improving, or that weekly unemployment claims were down. Immediate positivity with each new round of stimulus helped spur this kind of action on, but things always seemed to end up turned on their heads. Just when you read a headline about home sales improving another release shows them down again; at least that’s the way it looks from here.

The second thing ties into the downtrodden housing sector. Let’s not forget that is the area that caused the initial bleeding that led to the financial and credit related hemorrhage. Positive reports about housing are always a little bit like getting socks as a gift – you want to feel like it is the thought that counts, but way down on the inside you know it is a letdown. These numbers being reported are showing improvements off the worst or most dramatic drops. That means that they are improving on “really awful” which doesn’t speak to good news. Ditto on information about employment or manufacturing – these reports feel like they are worse when you start peeling off the layers of pretty paper. Yes, some jobs were added, but how many of those are at subsistence-level wages? And speaking of wage increases, are those happening for the consumer at a rate that can offset the gains seen in basic goods like coffee, wheat or gasoline?

That leads to the third poorly laid brick – consumer confidence levels. It would be difficult to find an average person who felt confident buying a house or making other big purchases in the current economic environment. The housing issue seems like an easy one for many analysts to see a silver lining in, but the reality is that consumers are still gun-shy in that arena too. Even though prices are incredibly low in many markets right now there is a fear that it is impossible to sell current homes for a reasonable price, making it too much of a gamble to try to sell one and buy another. Most people look to be sitting tight, trying to pay down credit card debt, and improve themselves financially rather than take the perceived risks associated with any change of that size. Student loans appear to be the only thing worth opening the proverbial wallet for and who could blame them? Unemployment levels have been so high for so long, and many consumers who are employed find themselves either underemployed or in a position where they are less optimistic about their perceived value. In essence, no consumer is an island – they know that it could be easy for their company or position to dissolve if global economic weakness drags on for much longer.  No nation is an island either, and the weakness in one area of the globe potentially affects others. The US has major trade partners as well as enormous amounts of debt held by foreign nations – that makes them a lynchpin to other economies. The trouble is, many nations have taken note of the potential weakness that is currently being driven by the huge deficit in the US – that’s a likely catalyst for the recent gold acquisitions by many foreign banks. It isn’t a leap to suggest that they see a drive towards alternatives to the US dollar.

 

Summary

Until substantial proof can be shown, I remain unconvinced of two things – recovery and a way for the US to balance its books. As long as there is a fundamental weakness to the whole structure, I think the government will have a hard time convincing Moody’s and Standard and Poor’s that things are going to get better. QE2 is done, but there are still a whole lot of issues that are dragging down the greenback. Gold and silver may have retreated from recent high milestones, but I think that at these levels the markets are going to see bargain hunters. It may be too soon to call an end to the uptrend in these markets. As if to support that idea, the latest round of data from the World Gold Council shows investor demand continuing, especially in China and India. The world is still cautiously eyeing the overall risks in the US and other Western powers, and that means taking risk off the table and moving it into assets they still see as havens. 

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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.