Sometimes they (the media) get it and sometimes they don’t. This time the Wall Street Journal is getting it right. While the market reacted soundly to the better than expected GDP numbers last Thursday, jumping 200 points, the quality of the GDP numbers were questioned. Most of the jump in the economy was due to consumer spending, which is generally a positive thing. However, the gist was that the numbers reflected the two major stimulus packages put forth by congress and the administration. The 8k first time homebuyers tax credit and the cash for clunkers.
Without these two government interventions, the growth of our economy would have been much slower.
So what is the GDP anyway? It is devised with a relatively simple formula: Consumption (of the private sector, you and me) plus business investment plus government spending plus the difference between exports and imports. In other words, if exports grew by 15% and imports grew by 16%, the result would be a decline of 1% of the proportion that exports and imports make up the economy.
GDP = C + I + G + (E – I)
So the debate is on. Is this recovery different from previous post recession recoveries and is it one that could sustain itself if the government stopped providing all of this stimulus to us?
The answer from the majority of economists seems to fall into the “no” camp. Which is the economy would not be doing to well if it hadn’t been for governmental stimulus. The consumer just isn’t feeling all that confident right now and needs to have a strong financial incentive to make any big moves.
However there was some good news that should be emphasized from the GDP report. Reported, was a large increase in exports, brought about, in large part, by the lower dollar which makes the price of our goods to foreign customers very attractive. Cheaper prices to foreigners have boosted the revenues of companies like Caterpillar and Intel.
However, the 15% increase in exports was offset by a 16% increase in imports as Americans still continue to buy imported goods.
There is a certain feeling however, and this is the important trend developing that might be changing the course of this recovery. And this is the point I want to draw your attention to. The Asian Basin and other developing countries are performing much differently today than in the past and have kept growing at a strong pace. It is entirely possible that the long awaited export boom to developing countries might be the in the making, replacing the softness in consumer spending in the US.
One example is the recent activities of UPS (United Parcel Service). According to the WSJ, UPS has been investing heavily as it gears up for what it expects to be a trade-led recovery, even though third quarter profits fell 43% from a year earlier, It is in the midst of spending $1 billion to expand a sorting facility in Louisville, Ky., and is planning to open a new facility in Shenzen, China. UPS has stated that it very much believes that the recovery from this global recession is going to be led by global trade and the projects that have been sacrosanct…are the projects that support global trade and support export volume across the world.”
So don’t be too negative. Yes, the US economy will probably remain soft for a while, but the seeds of a new boom in manufacturing and technology business in the US may be germinating.
Remember that no one can see that far into the future. Remember that in 2001, when all tech companies and dot coms were collapsing and many experts were announcing the death of companies doing business on the internet, a small company came from out of nowhere and changed everything. Want to take a guess which company I am talking about?
Google, of course. So, stay positive on the future and invest accordingly.
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Listeners of my radio show and readers of my blogs are always asking my opinion about gold. Is it going higher? Is it too high? Curiously, they are often ready to spout their opinions before I have shared mine.
It goes something like this: “Steve is gold going higher? Because, you know, with all of the new money the US government is printing it seems inflation is just around the corner. Don’t you think we should be back on the Gold standard? Because, you know, the dollar has lost so much of its value over the last 35 years”.
My response is usually, “Of course what you say may be correct, but there are no easy answers and understanding the true value of gold is especially troublesome.
Gold is affected by any number of factors; like its fabrication into jewelry and its role as a “storehouse of value ” in many countries around the world.
A few weeks ago I discussed an article from a well regarded expert at KIMCO, the large gold trading company, who stated he saw the real value of gold in the $600 to $850/ounce range versus the $1,000/ounce it was at the time of his article and the $1,100/ounce it is trading for around the time of this writing.
I further stated that due to the invention of the new exchange traded fund (GLD) which directly holds gold bullion to back up the share values, investors of all kinds can buy gold as easily as buying any common stock. Furthermore, you can do other “stock” type things with this new security like going short(selling gold you don’t own in the hope of buying it back at a lower price) and borrowing money to buy it. This expands ownership in the metal by enabling more investors to get in the game. This also means that sophisticated speculators can get into the game as well which further changes the fundamental dynamics of gold ownership.
All of this new activity leads us to ask new questions in order to truly understand what is going on. The most important question in my opinion, is whether the current price of gold accurately reflects its “true” or inherent value or is trading at a speculative price. This is not an easy question to answer but it is the most important question to ask.
As I stated before. the analyst at KITCO believes gold is now trading in a speculative range.
So, if gold is a speculative investment, does it mean you shouldn’t buy it? Not necessarily, you just need to understand that investing right now is more risky and dangerous than it was in the recent past. Can money still be made? Yes, without question. In my opinion, I think the price will continue to rise, but be sure you understand that you are investing at your own peril. Here’s what I mean; As we have seen time and time again, lots of money can be made speculating as long as you are no longer invested when things go sour. Like driving at top speed in a sports car, all is well, all is fun, and all is good-up to the very last second when you hit the wall. Then as we all have seen, it can all end badly.
What is the “appropriate” way to think about investing in this precious metal without “hitting the wall”? For the answer to this I want to share with you the ideas of Jeff Clark, Editor, Casey’s Gold & Resource Report
(http://seekingalpha.com/article/177692-how-to-predict-the-price-of-gold). He suggests keeping your eye on the U.S. dollar index; “This six-currency gauge of the greenback’s value has dropped 7.8% so far this year (as of December 3)”, meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do”.
He continues; (the numbers quoted are edited by me to make them more current). “Today, the US dollar index stands at 76.49. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 6.8% drop from current levels – this would imply a rise in gold of 33.3% and a price of about $1,495 an ounce.
Over the very long term we can calculate the long term value of gold IF these ratios stay the same. Its simple math, maybe a little too simple, but let’s play with it anyway. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $2,807. Just increase the price of Gold by 5% for every 1% decline in the dollar index.
Clark states; “Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory”.
One glaring problem with Clark’s idea is that these types of mathematical relationships change over time. Any specific ratio (in this case, 5 to 1) is good while it works, but since the ratio will change over time, it gives you very little insight into future prices. In other words, today’s ratio will be tomorrow’s curiosity. Beware of overly simplistic ideas.
To summarize, buying gold today is more speculation than investment. It may continue to rise very much like growth stocks did in the late 90’s,housing in 2005 and oil in 2008. Unless you are a particularly nimble speculator, keep your eye on the intrinsic value and focus on capital preservation.
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Posted in On The Money! Commentary | Tags: currency, economy, finance, Gold, inflation, interest rates, intrinsic value, investing, investments, KIMCO, new money, speculation, supply and demand, US government, Wall Street