   |
|||
Expectation of US recession a hand over gold marketChris Laird The US and West are going to find a world hostile to their intent, and become enmeshed in a deconstruction of the great World War 2 Western Prosperity Bubble. The world will have to reorganize economically, in great pain, to replace this prosperity bubble. The US will lead the heavily indebted west, the EU and Japan into a deep recession. The rest of the world, even gangbusters China and India, will follow soon after. But, continuing on the economic front, the US is fast about to begin a depression. The housing bubble will lead to a once in a century depression like the 1930's. Japan and China and India might not take it as bad, but they might also grind down with us too. I expect they will follow us into Depression. Europe is stagnating, hopelessly socialistic. In short, we are about to witness the 'post prosperity' world in the West. The beginning of the next US recession/depression will find the West with few financial reserves to cope. The trade partners of the US are also going to find tough slogging starting after Jan 2007, but delayed some perhaps. Post WW2 Western Prosperity Bubble After WW2, the West, led by the US, totally dominated the world economically. The West defined then was Europe, Japan, and the US. Since then, we have all accumulated massive public and private debts. This was done as the children of the baby boomers attempted to live at a standard of their parents, and the victor generation of WW2. At that time, China was an economic basket case. Russia was a blustering but bankrupt command economy, and Latin America a constant political mess. But the resource bull of recent years has filled Latin America's coffers, and they are breaking away from the Western economic/political juggernaut. Russia is finding itself financially again, now with close to $300 billion of reserves, largely built from the resource boom. China is exploding economically, as we all know. But Japan is mired in a seeming constant battle with deflation, their recent economic prosperity aside. Europe is socialistic. The US is a finance basket case. The next serious recession will deconstruct into a depression for the West. Then all the other players, China, India, Russia, Latin America, Asia, will deconstruct. The whole prosperity of those nations is very dependent upon the post WW2 prosperity regime in the West. When it lets go, for various and sundry reasons, they will have to create a new way to function economically. In the meantime, I foresee riots and deep economic depression for them too. What is the big question about gold now? It has taken all my powers
to try and get a picture of what gold is doing right now. I am quite sure that many gold investors feel the same way right now. Of course, quiet periods are usually a harbinger of major action. The entire world is balancing between gangbuster growth in the East and an actual depression about to emerge in the US. It is the last gasp of the finance bubble worldwide that seems to be centered in the US now, but actually started in Japan in the 1980's. I'm going to cut that part of the discussion short so I can get to the point. The big gold story right now is the impending economic recession or depression coming right now upon the US, and the end of the post WW2 prosperity boom in the West. I don't feel that it is a large jump for me to say the US is just about to enter a depression. Not a recession but a depression. Whether the rest of the world follows is another issue. To give you an idea of what a depression is, look at the recession of the early '90s. That was quite severe, but in no way a real depression. Or look at the micro recession post 911 - severe and deep world wide but short. The depression I foresee for the US, commencing about Jan 2007, is a long deep contraction that will ultimately be called the greatest US downturn since the 1930's. It might even exceed that in severity. Gold is reflecting this sentiment in the horizontal prices of the last month or two. The US housing bubble is clearly collapsing fast. The news out now about it is not sporadic bad news, its just very bad all around. If the US was showing better economic health, gold right now would be about $50 higher at least and probably $100 higher. I think gold first, and the commodity market in general, is going to reflect declining world economic demand that will become more clear by Jan 2007. Gold is by far the most forward looking 'commodity'. My previous articles on coming stock drops coming and gold anticipating this also speak to the same issue. If the US were to fall into the recession and depression that I foresee will start about Jan 2007, about 70% of US economic activity will pull back greatly- the US consumer. Considering the fact that the US accounts for about 30% of the entire world GDP. That US consumer retraction will spell doom for the world economy as well. Gold is reflecting this expectation. The fact is, if economic activity- in the world's largest economy by far- collapses, as I suspect it will beginning in 2007, gold will find that inflation vanishes, industrial production drops precipitously, and all those expensive commodities now are going to tank starting in 2007. Greatest gold force now The single greatest force on gold right now is an expectation of a collapsing US economy due to the collapsing housing bubble. That expectation is overriding every major gold bullish force now. Even war fears in the Middle East. The expectation of a coming US economic contraction is a great hand over the gold and commodities markets now. Now, there are seasonal reasons for gold to rise this winter/fall. But if war fears barely even kept gold up in the Middle East, who is to say that seasonal gold purchases in the Fall/Winter will keep gold up either? Frankly, I smell a weak or horizontal gold market this winter. It is primarily based on a dropping US economy, and dropping economic activity means deflation forces and a weakening gold market. Gold has repeatedly tested the 600 mark recently. Lots of gold analysts are saying we will see 725 or so gold by December. If the world economy was to hold in place at its present economic activity, maybe that will happen. But, I think we are going to see worse and worse economic stats out of the US, a pausing US and Japanese interest rate environment, due to economic sickening. That will translate into weaker commodities. Do you know that a typical new house has something like 1200 lbs of copper? Imagine the drop in copper demand if new real estate construction halts. Of course, China appears to be able to consume all the copper they can buy, but if the US slows greatly and their exports to us drop, and their own out of control building bubble pops, how much will copper drop? A lot. These financial writers forecasting strong gold into December are frankly looking at the recent economic past, but not the turning economic situation in the US now. It would seem that predictions for 725 gold by December are ignoring the severely weakening US economy. Often, financial writers stay caught up in the latest financial trends and miss the changes afoot. The financial trends of recent memory are:
Changing financial trends afoot now are:
The fact is, we are just about to witness the end of the gigantic post World War Two prosperity bubble in the West. But, the markets have not quite realized the extent of this change coming upon the world, nor the clear effects it will have on stocks and commodities too, once the US finally drops into a serious recession beginning about Jan 2007. In other words, the financial and gold markets are not quite cognizant of this huge shift in world economics. But gold might indeed be smelling the implications- hence, gold is very weak on the upside, and normally bullish news barely takes hold. A weakening US economy is going to cause higher federal deficits yes. It will not cause higher interest rates however. It will not cause higher US inflation either. Of course there are some inflationary forces in the pipeline, but once that is let out, I foresee a weakening inflation environment in the world in 2007. Unless you think that China is ready to take over the role of the US right now... something I don't think is quite ready to happen, to say the least. China has about 20 to 30% of the size of US GDP. Now, what does this mean for the price of gold? It would mean more horizontal price activity now, but as more bad economic news comes out of the US gold will find this suppressive. I think the gold bugs who are forecasting gold to rise to 725 or higher this year are not seeing the impact a slowing US economy will have on commodities and gold, and are really looking only at the recent several years where the housing bubble has dominated the US and world economy and of course has driven commodities over the moon. IN fact, financial writers and investors are not seeing the coming end of the great post World War 2 prosperity bubble in the West either. If China were to follow the US into recession, as I expect, I foresee a very large scale drop in commodity prices as well beginning in 2007 possibly by January, but definitely by June. Now there is one major caveat
to all this, the US economic decline and gold dropping. That
is major war news. War news is big for commodities and gold too. The Prudent Squirrel Newsletter is a big picture gold and economic commentary. Stop by and have a look. 321gold Inc |
