Changes to Watch for in the Coming Years
Inflation
We have yet to pass through the cycle of inflation. The Fed’s current loose monetary policy, as well as the way in which the CPI is calculated has kept inflationary numbers artificially low. The past few years have seen food prices rise by 47% and gasoline prices increase by close to 100%. By removing these numbers from the CPI calculations, inflation is projected at an artificially low rate. As the Fed begins to reduce the monetary supply and remove excess capital from the system through interest rate increases, inflation will return. Until we pass through the inflationary cycle, and prices stabilize and then fall, gold and silver will remain prudent safe havens.
INFLATION
We have yet to pass through the cycle of inflation. The Fed’s current loose monetary policy, as well as the way in which the CPI is calculated has kept inflationary numbers artificially low. The past few years have seen food prices rise by 47% and gasoline prices increase by close to 100%. By removing these numbers from the CPI calculations, inflation is projected at an artificially low rate. As the Fed begins to reduce the monetary supply and remove excess capital from the system through interest rate increases, inflation will return. Until we pass through the inflationary cycle, and prices stabilize and then fall, gold and silver will remain prudent safe havens.
Unemployment
The actual numbers for unemployment are much higher than the current rate the government is reporting. If the numbers of workers who have left the workforce is taken into account, employment figures have barely kept up with population growth, the true number of unemployed in the U.S. is over 12%. Around the world as economies struggle with reduced revenue rates and fiscal deficits, unemployment is on the rise worldwide. Until the underlying economies of the developed world begin to generate new jobs, the overall economy will improve slowly if at all. This also is very bullish for precious metals.
UNEMPLOYMENT
The actual numbers for unemployment are much higher than the current rate the government is reporting. If the numbers of workers who have left the workforce is taken into account, employment figures have barely kept up with population growth, the true number of unemployed in the U.S. is over 12%. Around the world as economies struggle with reduced revenue rates and fiscal deficits, unemployment is on the rise worldwide. Until the underlying economies of the developed world begin to generate new jobs, the overall economy will improve slowly if at all. This also is very bullish for precious metals.
HOUSING SECTOR
The housing sector will have to post several consecutive quarters of growth before the overall economy will turn around. Until it does, gold prices should continue to rise.
HOUSING SECTOR
The housing sector will have to post several consecutive quarters of growth before the overall economy will turn around. Until it does, gold prices should continue to rise.
INTEREST RATES
The Fed will not raise interest rates until the economy signals significant growth for several quarters. When they do finally adjust rates upward, this will be the first signal of cyclical change. The actual change in investment climate may take several years to fully turn around, but this is a good “canary in the coal mine” indicator to watch the other numbers.
INTEREST RATES
The Fed will not raise interest rates until the economy signals significant growth for several quarters. When they do finally adjust rates upward, this will be the first signal of cyclical change. The actual change in investment climate may take several years to fully turn around, but this is a good “canary in the coal mine” indicator to watch the other numbers.
MONETARY POLICY
The Fed will eventually end QE and will need to raise interest rates to remove excess money from the system. They have indicated that interest rates will remain low until at least into 2016, which means that they are not anticipating any major growth until at least that date. If inflationary forces due to excess money supply begin to show up in the economy, the market will raise interest rates for them. Until rates rise, stabilize and again begin to come down, the forecast for precious metals remains bullish.
MONETARY POLICY
The Fed will eventually end QE and will need to raise interest rates to remove excess money from the system. They have indicated that interest rates will remain low until at least into 2016, which means that they are not anticipating any major growth until at least that date. If inflationary forces due to excess money supply begin to show up in the economy, the market will raise interest rates for them. Until rates rise, stabilize and again begin to come down, the forecast for precious metals remains bullish.
GDP GROWTH
The Fed and the markets will not react until we have shown several consecutive quarters of robust economic growth in the range of 3.5%– 4%. As the economy picks up steam, these other indicators will come into play, monetary policy will shift to higher interest rates, the unemployment numbers will come down etc. GDP growth has been anemic for the past several years and is again slowing down signaling a possible recession. With the coming Fiscal Cliff negotiations and the possibility of a tax rate increase, GDP growth will most likely remain slow for the near future.
GDP GROWTH
The Fed and the markets will not react until we have shown several consecutive quarters of robust economic growth in the range of 3.5%– 4%. As the economy picks up steam, these other indicators will come into play, monetary policy will shift to higher interest rates, the unemployment
numbers will come down etc. GDP growth has been anemic for the past several years and is again slowing down signaling a possible recession. With the coming Fiscal Cliff negotiations and the possibility of a tax rate increase, GDP growth will most likely remain slow for the near future.
THE MEDIA
While the media is not an economic indicator, the cultural implications of media stories can affect the markets. Many analysts believe that the last great cyclical bull-run in stocks began with the publication of the Business Week article “The Death of Equities” in August of 1979. Over the next 20 years, the stock market returned over 18% annually, while gold and silver began their multi-year decline after hitting a peak in 1979. As the media was writing about a new investing paradigm of ever-rising equity prices in 1999, the tech bubble burst. Stocks entered what is a long term secular bear market in 2000. The Fed policy of QE has kept an artificial ledge under the stock market. Valuations and fundamentals do not justify its current levels. As the Fed ends the policy of easing, the market will begin to unwind as it enters the mark-down phase. Gold should begin to see prices accelerate as the stock market comes down. Monitor the media, you will begin to see favorable articles about precious metals. More articles about stocks and business will turn decidedly negative. This may signify the beginning of the turn for the precious metals bull market.
THE MEDIA
While the media is not an economic indicator, the cultural implications of media stories can affect the markets. Many analysts believe that the last great cyclical bull-run in stocks began with the publication of the Business Week article “The Death of Equities” in August of 1979. Over the next 20 years, the stock market returned over 18% annually, while gold and silver began their multi-year decline after hitting a peak in 1979. As the media was writing about a new investing paradigm of ever-rising equity prices in 1999, the tech bubble burst. Stocks entered what is a long term secular bear market in 2000. The Fed policy of QE has kept an artificial ledge under the stock market. Valuations and fundamentals do not justify its current levels. As the Fed ends the policy of easing, the market will begin to unwind as it enters the mark-down phase. Gold should begin to see prices accelerate as the stock market comes down. Monitor the media, you will begin to see favorable articles about precious metals. More articles about stocks and business will turn decidedly negative. This may signify the beginning of the turn for the precious metals bull market.
In addition to loose monetary policy and a weak dollar, the current questions regarding Universal Healthcare, the deficit and tax policy in the US are weighing heavily on the market. All of these factors also point towards strong bullish sentiment for the precious metals moving forward.
While these are all very broad indicators of the state of the economy, you can begin to infer the direction of the market. As you see these numbers turn positive, it may be time to dig into them a bit deeper to gauge the state of the current cycle.
The current secular bull market in precious metals and commodities has a way to go. The next 8-10 years should see gold continue to rise as the stock market unwinds and returns to historic rates of return.
As with any secular cycle, there will be fluctuations in values, profit taking and short cyclical bear markets. By keeping the economic numbers on your radar screen, you should be able to determine when the long-term cycle trend begins to shift.
As with any portfolio, asset allocation is an important factor. The present economic and socio-political conditions warrant investing at least a portion of your assets into physical gold and silver. Work with a reliable dealer and take physical possession of your metals. Be sure to store them in a safe place.
By understanding and following long-term cyclical trends, you will have a leg up on many investors.
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