Weak GDP, strong inflation, Fed fear, stocks fall
By David Bradshaw ~ email ~ web links ~ wisdom seekers
Editor, Real Money Perspectives ~ Daily podcast ~ Weekly email
June 29-30, 2007 ~ *latest news*
Stories of interest ~ Special reports
* Fear at the Fed -MN
* Oil Prices Back Above $70 a Barrel -AP
* Immigration bill dead in Senate -WND
* Inflation worry in GDP data -MW
* Banks 'set to call in swathe of loans' -LT
* Home Sales Slowest in 4 Years -AP
* BIS warns of Great Depression dangers -LT
* 7 in 10 Say Economy Is 'Getting Worse' -GP
* $1,000 Gold Ahead -Sp Offer
* Gold prices crested $650/oz. Friday on a weaker dollar and $70+ oil prices then fell at the close. Gold closed in NY off $.40 to $647.50/oz. Silver fell $.06 to $12.30/oz.
* In June gold fell .9% ($6/oz.), but ytd gold is up 7% from the 1/5/07 low of $605/oz. For the month silver fell 6% ($.73), but ytd silver is up 1.5% from the 1/5/07 low of $12.12.
"Gold is presenting a solid technical trade at these levels, and the risk/reward scenario makes this an attractive investment," reports Thestreet.com.
"For investors who have waited for a good entry point to add to their gold holdings, this latest summer price dip represents an excellent buying opportunity. A long-term diversification strategy works for those with the disciple to buy short-term weakness and improve the overall 'cost dollar average' of their portfolio," says Swiss America CEO Craig R. Smith.
James Moore of TheBullionDesk.com told AFX, "Longer-term high energy costs, inflation and extreme volatility in the equity markets are all likely to prove favorable for gold as investors add some safe-haven protection to their portfolios."
On Wall Street...
* "Confidence among U.S. consumers fell in June to a 10-month low as mortgage rates rose, home values dropped and gasoline prices held near a record high. The Reuters/University of Michigan's final index of consumer sentiment declined to 85.3, from 88.3 in May, reports Bloomberg.
* The Federal Open Market Committee (FOMC) decided to hold key interest rates at 5.25%, stating, "A sustained moderation in inflation pressures has yet to be convincingly demonstrated." The Fed repeated that the risk that inflation will fail to moderate as expected is the "predominant policy concern."
* "Fear ruled the Fed decision. The world of speculation has been given yet another pain-relieving injection of aspirin. So, surprise, surprise, both bulls and bears on Wall Street were satisfied," reports Moneynews.com.
* Crude-oil prices climbed past $70 a barrel again Friday gaining support from U.S. data, which showed that strong demand and lower imports prompted a decline in gasoline and distillate supplies despite an increase in refinery activity.
* U.S. stocks fell Friday, despite portfolio managers making last-minute purchases as the first half of the year closed. For the month of June, the Dow fell 1.6%, the S&P 500 fell 1.8%, while the Nasdaq fell fractionally.
Disappointing GDP revisions showing the first quarter growth was the slowest in four years and ongoing jitters about the subprime mortgage market and hedge fund woes weighed on stocks investors.
"The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans," according to a report by Lombard Street Research.
The London Telegraph reports, "Excess liquidity in the global system will be slashed. Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."
"The near-collapse of two big Bear Stearns hedge funds heavily invested in highly-speculative packages of subprime mortgages indicates that the severe housing recession is spreading to the financial arena and is threatening the occurrence of systemic fallout," writes Comstock.com.
The problem is that what we've seen to date is probably only the tip of the iceberg. David Viniar, Goldman Sachs CFO, and former head of firm-wide credit risk, stated that "I continue to believe that we haven't seen the bottom in the subprime market. There will be more pain felt by people as that works through the system."
Both the Dow and S&P indexes hit new record highs in May (nominal , not inflation adjusted) after government reports showing more jobs were created May than expected and inflation has fallen back into the Fed's "comfort" zone.
"In the current one-way market, all problems are overlooked and rationalized," writes Doug Kass for Thestreet.com. Here are his 15 reasons stocks should be falling.
The FED Speakth...
"The static 5.25% [Fed funds] rate poisons vulnerable, over-levered homeowners and stimulates resplendent, opportunistic U.S. corporations. So what's a Fed chairman to do? Hike rates in order to slow stock buybacks and cool the stock market, or lower rates so that homeowners can continue to afford to live a frugal existence? My money is on the side of the American homeowner and lower short-term rates," writes Bill Gross at FT.
The Fed said their predominant policy concern remains the risk that inflation will fail to moderate as expected, said the FOMC Statement.
In June the Labor Department reported a .7% rise in the May CPI, the second largest increase in 16 years. The dollar fell against the euro but remained higher against Japan's yen after the consumer price data.
Calculations of 'core' inflation strip out food and energy prices, seen as volatile and therefore liable to skew any snapshot of consumer price levels. But some analysts now argue that a steep climb in the cost of food worldwide in recent months could be permanent, or at least long lasting. Merrill Lynch has coined a term to capture the phenomenon of food prices forcing up consumer prices more broadly: "agflation," reports Reuters.
"The Fed has 'chickened out' yet again and will make conditions far worse in the future as the U.S. dollar continues its downward, inflationary plunge and, what we term, stealth inflation becomes progressively unleashed upon the financial world," according the editors at MoneyNews.com
"The Fed is now trapped in a "Catch-22" economy. If they cut rates the U.S. dollar, which is near historic lows, may crumble further. If they raise rates it may trigger a housing collapse and U.S. recession," says Craig R. Smith.
Sentiment among U.S. homebuilders slid in June to the lowest level in more than 16 years as tighter lender practices and rising mortgage rates crimped sales, the National Association of Home Builders said Monday to Reuters.
The U.S. economy slowed to a .6% growth in the first quarter, held back by falling investments in homes, shrinking inventories and a larger trade gap, the Commerce Department reported.
"U.S. taxpayers are now on the hook for a record $59.1 trillion in liabilities, equal to $516,348 for every U.S. household. It will cost more to repay the debt over time. Each household would have to pay about $31,000 a year over the next 75 years," reports USA Today.
For the S&P 500 to reach a true, inflation-adjusted high it must top 1,800 and the Dow must top 13,800. The inflation-adjusted ("I-A") S&P 500 index is 1,250 and the I-A Dow is 11,050, assuming a 2.6% "official" CPI inflation rate over the last seven years totaling 18%.
"Dow 13K is a kind of sleight of hand, brought about by inflation, and distracting the majority of people from the true condition of the economy," writes Michael Nystrom of Bullnotbull.com.
"This is looking more and more like the complete madness seen in 1999-2000, though playing out across a different stage, with different themes and for different reasons. One day, folks will look back on this period and marvel at what passed for wisdom," writes Bill Fleckenstein for MSN.
"Every smart investor hopes to buy low and sell high. The hard part is determining what's low and what's high. My simple, time-tested strategy is to sell-high, then buy-low! With the Dow topping 13,000, what better time to take some profit and move it into gold?" asks Swiss America CEO Craig R. Smith.
"There's never been a more important time to diversify a minimum of 5%-10% of your portfolio into gold for two main reasons: to hedge ongoing market risks and because gold offers peace of mind," Craig R. Smith told The Derry Brownfield Show.
"A greenback has no intrinsic value. It is faith-based. That the paper dollar finds favor the world over must be counted as one of the greatest achievements in the annals of money. To paraphrase Richard Nixon, the president who closed the US gold window in 1971, we are all dollar bulls now," reports FT.
"Given our expectation of continued favorable supply-demand fundamentals, we expect gold to retest the January 1980 high at $850 an ounce this year (2007), with a new target at $1,000 an ounce. While $1000 may appear overly optimistic, it is important to remember that gold rose nearly 3,000 percent from 1971 to 1980 and is only up 166 percent from its low in 1999," says John Ing, Precious Metals Analyst, Maison Placements.
Dollar vs. Gold...
"Right now, the time window has shifted for the price to move beyond $700," said Peter Spina, an analyst at GoldSeek.com. "I would not feel comfortable betting against gold at these levels, although it does appear the rally will take a summer vacation," reports MW.
"This [global monetary] system as a whole relies upon a touching faith that enough countries will play by the rules of the market, so that the market will continue to function with rules that can be exploited as national self-interest dictates. Interesting concept. Don't think I'll sell my position in gold just yet," writes Jim Jubak at Moneycentral.com
"Gold has had a nice seven-year run. But the monetary phase of the bull market has hardly begun. How could it have? People, for the most part, still trust the currencies in their wallets and the central bankers who print them. The day gold stops trading as a decorative asset, and begins trading as an alternative to Bernanke & Co., is the day that the gold bull run, part II, begins," writes James Grant, editor of Grant's Interest Rate Observer for Forbes.
"A portfolio minus gold at this time is like walking around naked in zero-degree temperatures," says Raymond Stahler, a principal money manager at London-based Stahler Dearborn Ltd.
"The dollar is close to breaking through support levels and if it does that then it could have significant implications for all markets, and certainly for the Treasury market in terms of inflation," Bill Gross of PIMCO told Bloomberg television.
"A near-perfect storm has aligned both technically and fundamentally for gold," said Peter Grandich, editor of the Grandich Letter. "A test of the 2006 highs around $735 is not a question of if, but when," reports MW.
"The reason we have seen the gold market fail to take the $700 level recently is due to the continued increase in Central Bank gold sales, specifically those out of the European Central Bank (ECB) system," reports Goldseek.com.
"The current bull market for gold could last another five years, if certain conditions are in place, and the metal's price could soar to an incredible $1,500/oz. Investors should buy gold to beat the current period of stagflation," says Merrill Lynch economist David Rosenberg.
"A sharp decline in the Dollar Index below the 80 level will likely take down the bond, stock, and real estate markets as well. Since a lower dollar will exert additional upward pressure on already rising consumer prices, the ensuing combination of rising inflation, higher interest rates and lower asset prices will be a toxic mix," writes Peter Schiff of Euro Pacific Capital.
"Dollar weakness will continue and gold will eventually soar based primarily on this factor," said Adrian Day, president of Annapolis, Maryland-based Adrian Day's Asset Management, which has $113 million in assets, reports Bloomberg.
"Gold prices could exceed last year�s 26-year high of $730 an ounce within the next 12 months due to a weaker dollar, rising geopolitical tensions and an investment led rally," according to the annual survey by GFMS, the metals consultancy, reports FT.
Last week Barclays predicted gold will average $710 in the third quarter. "In the near term gold prices are likely to consolidate at lower levels before the next push up," said Suki Cooper, analyst at Barclays Capital, reports Forbes.
"Despite recent weakness, the gold market, at anytime, could revive and move higher," said Peter Spina, an analyst at GoldSeek.com. At the same time, "seasonality factors are coming into play, so the case for a continuation of sideways action is quite convincing," reports MW.
StreetTRACKS gold shares, the world's largest gold-backed exchange traded fund (ETF), said it has dropped a substantial amount of bullion holdings over the last two days, signaling reduced exposure by investors due to weaker prices, reports Reuters.
"My conservative expectation is that gold will end the year decisively above $700/oz., which equates to at least a 15% gain for the year. However, we cannot rule out various economic wild cards, such as Iran or a spike in oil prices, which could send gold soaring above $800 an ounce or more at any point," said Craig R. Smith, in a recent interview.
"If gold can rise and stay above $690, then $722 will become an easy target. That would reconfirm that a very strong bull market is underway," reports Mary Anne and Pamela Aden of Aden Forecast.com
"All 14 'strategists' at the largest Wall Street Firms are calling for a higher [stock] market in 2007. The last time this bullish consensus occurred was at the start of 2001. The DJIA subsequently fell 40% over the next 2 years," reports TheMarketOracle.com
Prudent Bear Fund manager David Tice forecasts a 50 percent to 60 percent decline in the market over the next two years," reports NY Times.
According to Tice, �What we have is gross credit excess� on both the personal and national levels, he said, and credit excesses fuel the speculative manias of classic boom-bust cycles. �Individuals are using their homes as an A.T.M. machine with home equity loans,� he added.
"Commodities prices are outpacing stocks and bonds for the first time in nine months and, according to many analysts, the quarterly rebound is likely to continue as China keeps increasing its imports of raw materials," reports Bloomberg.
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Market Volatility Ahead
"Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," says Jim Rogers.
"A recession and a meltdown in the mortgage market could easily give you a 25 to 30 percent plunge in the major indices - the S&P 500, the Nasdaq composite, and the Dow. Birds of a feather who have been shot fall together," said Pace University's Professor Robert H. Parks to The Journal News.
"I recommend an age-old strategy to offset market volatility and insure your nest egg never crashes to the ground, as stocks and paper currencies are prone to during turbulent times. Owning some of history's indestructible shiny yellow metal, gold, can also help make your portfolio indestructible today," says Craig R. Smith.
"With gold only taking a tiny proportion of new money going into investments of all kinds � just $14 billion last year � there is clearly huge upside potential should big money decide to move into it for any reason. Gold should be a core holding in everyone�s portfolio. 10 per cent would be a good figure," writes Moneyweek.
"The drivers for gold look set to support firm prices over the year ahead. We believe that the next sustainable rally phase will successfully challenge and exceed the existing highs at $728," said analysts Ray Hanson and Robert Sluymer of RBC Capital Markets.
"The dollar has been crushed," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "The fear of a hard-landing in the U.S. seems to be gathering force."
"All of the markets have been volatile and the precious metals have not been an exception. These markets, however, remain bullish. Despite the recent downward corrections, the major trends are up. With the dollar now in a renewed declined, this will continue to keep upward pressure on gold, write The Adens.
"Gold analytics, charts and quantitative models are showing bullish patterns. In the past these kinds of patterns in gold, in spite of disinflation and deflation, have preceded a massive rise in gold through panic buying and a nasty meltdown-type collapse in the financial markets," opines IndiaDaily.
"Gold remains well below the price it would be trading if government-led gold cartel wasn�t regularly intervening to keep gold as low as it can. The volatility in the stock market and growing nervousness about asset quality of sub-prime mortgages is another reason to own gold," says James Turk of Goldmoney.com.
"If your outgo is higher than your income, your upkeep will be your downfall. Like the 80-year-old woman who borrowed her way into home disownership, so are millions of American homeowners. They, too, think they have a perpetual ATM machine: their homes. They also think they have a backup ATM machine: the U.S. government," reports Dr. Gary North at LewRockwell.com.
It's simple to convert an existing IRA or 401k retirement account into precious metals, without tax penalties or new contributions... more
2007 Golden Trends...
"The rise of gold and the fall of the dollar are issuing strong warning signals that the Fed is veering into uncharted territory, a territory that would be labeled off limits if it were on a ski slope. The slippery slope entered may cause havoc in asset prices ranging from equities to fixed income to real estate," writes Axel Merk in The Merk Perspective.
"Commodities should be on every investor�s wish lists as the sector is in the middle of a �super cycle� that occurs only once every 50 years, according to BlackRock Merrill Lynch.
"The Swiss strategy of diversification indicates now is the time to buy gold, oil and bonds while waiting for the market to tell us if this is a trade-driven sell-off or an overdue stock market correction from the rampant speculation of the last four years," said Craig Smith.
"Gold is headed toward $1,000/oz. and is still a great bargain under $700/oz. As this gold bull bucks up and down it seeks to shake off uncommitted, short-term investors and speculators, offering long-term investors yet another opportunity to participate in this ongoing secular bull market," says Craig R. Smith.
Experts say the global stock market rout in February triggered the recent gold sell-off as investors cashed out bullion holdings to cover margin calls. Others analysts say major speculative funds are selling and withdrawing from exchange traded gold funds.
"South African gold production fell by 7.5 percent in 2006, its lowest level in 84 years, as lower grades were mined because of higher gold prices, according to the Chamber of Mines.
Investor sentiment remains bullish on gold so far in 2007 as precious metals continue to outperform the major stock indexes for the sixth consecutive year.
"With the pullback in so many markets, it is fair to say that the gold and silver pullback is not about gold and silver," said Julian Phillips, an analyst at GoldForecaster.com. "These falls [have more] to do with short-term traders perceptions and technical selling."
"If anything, the sell-off in Chinese stocks will increase demand for gold," said James Turk, founder of GoldMoney.com. "As investors in China get burned with stocks, they will shy away from speculative stuff, and opt for the security that gold offers," reported Mr. Turk to Bloomberg,
"You don't have to be a bear these days to take a shine to the yellow metal. I think there's room for gold in everyone's portfolio... but I thought I'd do some homework to make sure that my next foray into precious metals proves more rewarding then the last one," writes Igor Greenwald at Smartmoney.com. [Ed. Note: Learn before you earn!]
"We are about witness the largest upleg of the gold bull, which will make the gains of the dotcom boom seem like minor blips on the radar. The bullish indicators are all lighting up and we are forecasting some fireworks on the horizon," reports Jason Hamlin at goldstockbull.com.
"Gold has no agenda, no allegiance and functions as honest money in a world of lies, corruption, overstatement and spin. $700 to $705 might well be a place certain interests will try and block gold, but their only hope is for momentary success. $761 is yanking at gold from the front with great power. $887.50, a break above $1000 and $1650 are putting their grip on the royal metal as well," writes Jim Sinclair of JSmineset.com.
"Gold's recent rally might be an indication that the Fed and Bernanke are losing credibility and that the Fed is all talk and no action," said Peter Schiff, president of Euro Pacific Capital to MW. "The Fed is afraid of raising interest rates, but it can't let the market know that. Gold's saying we don't believe you. The Fed wants to maintain the illusion that they're going to raise rates, because the economy can't stand it," Schiff said.
"What is the price of gold warning us of?" CNBC asked Peter Schiff of Europac. Mr. Schiff said rising gold is a sign of a loss of international confidence in the U.S dollar and also warning of a major decline in stock prices, sighting that the "Dow/Gold ratio" has fallen from 44-to-1 back in 1999 to 19-to-1 today.
The Dow theorist Richard Russell says the Dow/Gold ratio will eventually fall to 1-to-1. "The reversal of this huge rise in the ratio will be a major decline, a decline to the point where the Dow again might buy only 1 ounce of gold or even less. This will require either a huge rise in gold or a massive decline in the Dow - or probably both."
"The gold market has been and will remain restrained like a magnificent bull with numerous gigantic reins, hardly rampaging, but surely towing the gaggle of central bankers uphill. Since the currency system is unfixable, and debt must accelerate, the gold bull will breathe endless life, since the alternative is a rampaging recession aggravated by debt default and asset deflation," says Jim Willie editor of the HAT TRICK LETTER.
"Our current financial condition is worse than is widely understood", reported U.S. Comptroller David Walker to Congress in February. "Our current fiscal path is both imprudent and unsustainable. Improvements in information and processes are needed and can help. Meeting our long-term fiscal challenge will require (1) significant entitlement reform; (2) reprioritizing and constraining other spending programs; and (3) more revenues--hopefully through a reformed tax system. This will take bipartisan cooperation and compromise." Full Report pdf
Fed Chairman Ben Bernanke said recently the U.S. government may face a "fiscal crisis" in the coming decades should it fail to deal with the rising costs of Social Security, Medicare and Medicaid programs. "If early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," Bernanke said.
"The Bank Credit Analyst (BCA) has identified four pillars cementing the case for a long-term bull market in gold bullion; global liquidity, rising investor demand, central bank buying and Chinese/Indian gold demand," reports Mineweb.
"What we are witnessing are two worldviews on gold. U.S. traders are in 'la-la land' and are bearish on gold and bullish on paper. The rest of the world is bullish on gold and bearish on the U.S. dollar," said Ned Schmidt, editor of the Value View Gold Report.
"In the next few months, we could get a severe correction in all asset markets," Marc Faber told Bloomberg TV, but "The price of gold will continue to go up and probably very substantially."
In 2006 Faber told Bloomberg, "A vicious drop in the Dow coupled with a vicious rise in gold, possibly pushing gold to an astounding $2,000, $3,000 or even $6,000 an an ounce." (Read Who Sees Four-Digit Gold?). May 2007 STORIES
Recent stories of interest...
* Real-Estate Investors Heading Overseas -WSJ
* Gas at $6 per gallon? Get ready. -AC
* On Returning to the Gold Standard -BNB
* Cutting Through the Bull -SH
* Home builders' index falls to 16-year low -MW
* A Unique Era -The Adens
* All Eyes on Rates as Fed Meets Next Week -MN
* May Consumer Prices Jump 0.7 Percent -MN
* Main Street all shook up by the Fed -FT
* Volatility Doesn't Scare Gold Consumers -MN
* Fed may raise rates this month -MW
* THE BEST GOLD TODAY -Sp. Offer
* Put "sell high, buy low" strategy to work -CRS
* The Savage Truth About Gold - Sp. Offer
* Producer prices rise 0.9% in May -MW
* Real world inflation 7% -Sp Report
* Swiss gold sales dash hopes -Tele
* May spending spree boosts Dow -WT
* CHARTS: A Record Setting Stock Market -CC
* The $emantics of Investing -WND
* Gold: new claims of cartel manipulation -MW
* Remain Calm! Only a bunch of Bear Mkts -FS
* Stocks fall sharply as bonds rise further -MW
* Is America ready for Iran? -WND
* What's Behind the Stock Market Jitters? -WSJ
* Gold may touch $1,000: JP Morgan -BL
* Bears on stock stampede -MW
* Golden Independence -Sp Offer
* 'Lazy Portfolios' beat S&P 500's 'record' -MW
* Gold Joins the Mainstream -Forbes (free reg.)
* Markets rally to new (nominal) highs -MW
* Gold climbs on weak growth, high inflation -TF
* Economy: Worst Growth Since 2002 -AP
* Dow's rise fuels fears of correction -AJC
* Bullish on bullion? -Reuters
* Recommended Federal Reserve Policy -North
* Taxpayers on the hook for $59 trillion -USAT
* Greenspan fears recession in 2007 -CNN
* Who says we're not headed for a recession? -MW
* Robert Shiller: Mr. Worst-case scenario -Money
* Vacation Inflation -MSNBC
* Existing home sales 4-yr low -MW
* Home sales jump 16%, prices fall 11% -AP
* Greenspan warns of Chinese stock bubble -MW
ABOUT THE EDITOR
David M. Bradshaw is Editor of Real Money Perspectives, a daily financial/market news digest. In 2001, he published REDISCOVERING GOLD IN THE 21ST CENTURY and has been an economic commentator since 1987, as producer/co-host of "World Economic Perspectives" radio show. In 2005, he released a new CD, "WHAT'S YOUR WORLDVIEW?" from his 24-hour series, "THE BIG PICTURE." MORE at MIF... Personal note: Youngest daughter Braida Zoe (age 3) swims, loves animals, music, dancing, reading, hiking, trampolining and collecting things. Shown with mom, Micki, and dad (me).
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.