The Gold Market Discussion: 4/12/15: What Recovery?

The Gold Market Discussion: 4/12/15: What Recovery?

Jim Clark

After starting a little soft last week, gold finished strong on Friday, closing at $1,208. Silver also started off weak and finished at $16.58.Let’s look at some economic news both here in the U.S. and abroad and its affect on the yellow metal.

According to Bloomberg, analysts are predicting the the Standard & Poor’s 500 Index profits are about to decrease for three straight quarters. History has shown that once earnings drop for that long, they almost always keep falling, and usually take the market with them. This has happened 82 percent of the time in the past eight decades. Also according to a Bloomberg analysts, investors may face the longest stretch of profit declines since the 2008-2009 financial crisis. Oil companies are expected to post the worst first-quarter results among the S & P 500 industries, with profits dropping 63 percent. This is a result of faltering demand and booming supplies from North American shale fields. Income from four other groups, including producers of household goods, are also forecast to fall. The dollar, still near a twelve year high, has actually  hurt sales for firms like Proctor & Gamble Co. One example of lowering dividends is the company Freeport-McMoRan, which explores for copper, gold and other materials. They stunned investors by slashing dividends 84 percent! This resulted in lost dividends of $1.1 billion. Dividend reductions are extremely rare in the materials sector. When earnings estimates deteriorate, companies like Home Depot Inc. and Comcast Corp. start stock buybacks resulting in higher stocks but not real profits. It’s a strange economic picture we have, with still near-record low interest rates and stagnant pay, which has enabled CEOs to increase profits an average 15 percent a year since 2000, or three times faster than sales!. However, this is poised to change as the Federal Reserve prepares to raise interest rates amid a (reportedly) improving labor market. By the way, what would rising interest rates do to gold? In the late 1970’s, during rising rates when bond yields surged into the double digits, gold and silver experienced one of their greatest runs. When interest rates are running below inflation rates, that is favorable for precious metals. So even even if interest rates go up, with inflation inevitable due to monetary policy, gold and silver will too.

We still hear in the news that the economy is improving, but most don’t see it. A March 6-12 poll by Bank of American Corp. showed a net 35 percent of respondents in the survey picked the U.S. as the worst place to invest in the next 12 months. The dollar’s rise has many nations worried about a debt crisis in the making. The recent example of Greece has been a lesson that is still being felt globally. Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says that, “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.” (source). You see, the developing countries have been taking advantage of the rock-bottom interest rates and cheap money created by quantitative easing to stack up billions in new debt. Countries like Turkey, Malaysia and Chile have large dollar-denominated debts and sliding currencies, and a string of African countries face sharp rises in debt repayments. These countries are turning to the International Monetary Fund (IMF) for relief. They are asking for financial help from the IMF and bankruptcy processes akin to the Chapter 11 procedure for companies to be applied to governments. In other words, it looks like, as Ms. Pettifor said, the lesson of 2008-2009 has never been learned.

That is why it is so important to have a portion of your money in precious metals. Gold and silver will protect your wealth during another economic crisis. Gold is always real money with real value. It can’t be printed and devalued. In Cyprus in 2013 the government took a portion of all deposits (which is called a bail-in) from banks in order to remain solvent. This concept is being introduced here and could be implemented sooner rather than later. Diversification in physical holdings of precious metals makes more sense now than ever.

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“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”