Gold Forecaster
- Global Watch
Where does Gold go in a
U.S. recession
Julian D.W.
Phillips
Sep 6, 2006
"If the U.S. citizen
has been the global engine buying up all the Chinese goods then
doesn't it make sense that if a recession occurs in America then
it would affect all commodities including precious metals."
A very good question from one
of our Subscribers! [We welcome questions from Subscribers]
On the surface it appears to
make good sense. To answer it one has to look at the sense
of proportion on the global economy as well as on that of the
U.S.
1. A recession technically
is two declining quarters of lower or zero and minus growth.
A Depression is anything beyond this. The potential recession
that lies ahead is as a result of not only the interest rate
rise, but the rising oil prices, together with manufacturing
moving to Asia. I am of the belief that interest rates will
fall far quicker than they rose if a recession were to impact.
I have no doubt whatsoever that the Fed places growth continuation
well above inflation fighting. Once an economy starts to deflate
and confidence slides away, it may well be beyond the Fed to
turn it around even if they drop interest rates dramatically.
If oil prices continue to rise, then growth will have to be
saved through tumbling interest rates and more. This will encourage
inflation and place tremendous pressure on the $ in global foreign
exchanges. The Fed will struggle to keep it high.
2. The cheap imports from China
actually contribute to lower inflation within the States, undercutting
local prices as they do. This is one of the reasons why inflation
has been low.
3. China and India are growing
at an 8 to 10% growth rate per annum. In the case of China,
I would see within 5 to 10 years it gaining sufficient momentum
to be a main global economic driver in itself. Already it is
providing additional growth to the countries around it in Asia,
such as Japan and Korea. It is this growth, on top of the usual
demand from developed countries that is placing such pressure
on the limited commodities available on the world market. After
all these resources were projected on a future, without growth
in either China or India. The newcomers are two more at a table
already full.
4. It is easy to think that
because the U.S. is the main driver of the global economy it
is the only one. This is not so. Europe is developed with
over 400 million citizens to which, one has to add every other
economies of the world, all buying from China and oil from OPEC.
They are interlinked and interdependent. The U.S. with 300
million people is the main pivotal driver at the moment but only
in terms of leading the way, not being the army itself. Therefore
the impact of a recession in the States, whilst Europe is still
expanding [which is today's reality] will not have the global
impact expected, unless the sliding of confidence in global growth
and global currencies follows.
5. Consequently, even with
a mild recession [and I see no more than that now provided the
oil price does not hold over $85], the demand for these commodities
on the world markets will remain high. Now stack that against
a commodities market that has neglected exploration for so many
years and you see that one of the main problems facing the global
economy is that it does not have sufficient resources to supply
this burgeoning global economy for years to come. Certainly
a recession in the States will not lead to a significant enough
drop in demand to rectify this shortage to the extent prices
come down.
6. Turning to precious metals
one finds in Silver a market that has been supplied to a great
extent government sales of stockpiled silver, once used in coins.
The there was and is the change to digital camera from silver
based photography, which led to dropping demand as we are now
seeing. The silver market has largely absorbed this so far
producing dropping supplies [as government sales in China and
India have now ceased] and rising demand [as new industrial uses
have to some extent supplanted photography demand drops]. Now
add to this the amazing demand from Exchange Traded Fund, which
to date have accounted for just under 100 million ounces, and
you have a situation which despite any recession will continue
to see higher prices. The monetary aspect of silver, still
not a feature in the silver market, of consequence, is yet to
come, sometime in the future.
7. Gold too is experiencing
a rise of demand over supply in total. Not only is it rising
as a metal, but the investment/monetary aspect of gold are a
feature of that market and likely to remain so even in a depression.
Gold after all is a place to keep your asset in uncertain times,
when other assets face dropping prices. Those who invest in
gold do so with surplus cash and are of the sort not so badly
affected by a recession per se. So its value has broadened
far beyond simply being a commodity.
8. But gold's real value lies
in uncertain times, when doubts about currency values persist,
when doubts about other asset values appear, doubts about the
future not just of the U.S. economy, but about the global economy
disturb investors to the extent they seek a refuge in the one
asset that holds or increases it value in extreme times, gold!
So we believe that gold is
an asset that will hold steady or rise in value 'in extremis',
as Greenspan wrote. The value of gold is that it is an instrument
of value where no other one is. It is not a 'promise' to pay
the bearer', which currencies are, but an asset that can be treated
with value in the darkest days of war, even in enemy territory.
It is the knowledge that increasingly uncertain days lie ahead
that is attracting responsible investor to the gold market.
These could well include national governments as well as large
institutions. The sight of Central Banks slowing down their
own sales of gold stands testimony to this.
-Julian D.W. Phillips
email: gold-authenticmoney@iafrica.com
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