The gold and silver markets have seen a recent pullback as of late primarily in response to a slowing Chinese economy, continued bond tapering efforts and a stronger than expected ADP jobs report. The slide continued early this morning in response to the BLS announcement of 288,000 new jobs created during the month of April, which far surpasses consensus estimates of 218,000 new jobs; however, gold and silver have since bounced back in late morning trading. Not only did new job creation beat forecasts by 70,000 new jobs, but the official unemployment rate dropped to 6.3%,
which is the lowest since September of 2008.
Is it time for gold and silver investors to throw in the towel or is there reason for optimism? We believe the latter. For one, our national debt is over $17 trillion, which is higher than our annual GDP, annual deficits continue to run close to $1 trillion a year, the Federal Reserve’s balance sheet has ballooned from $900 billion to over $4 trillion over the past seven years, and has yet to reverse course, and interest rates are beginning to rise even though the Fed’s foot is firmly on the quantitative easing accelerator. Furthermore, new mortgage applications have fallen off a cliff and home ownership is at its lowest level in 19 years. Considering that housing is one of the strongest drivers of our economy and that consumer spending accounts for 75% of our GDP, an eventual slowdown appears inevitable.
How is it that the Federal Reserve’s monetary base continues to increase while headlines would indicate otherwise? It’s simply that the Federal Reserve hasn’t tightened monetary policy. Rather, they’ve reduced the rate of monetary expansion from approximately $1 trillion per year to an annualized rate of $500 billion over the past few months. If it continues on its current pace of reducing monthly purchases by $10 billion, it will still add an additional $100 billion to its monetary base over the next few months, which is not an insignificant amount. The challenge will come when the Federal Reserve attempts to unwind its massive balance sheet without sending the economy into a recession. Historically speaking, the economy has slowed, and in many cases slipped into a recession following the withdrawal of liquidity from the system.
For the reasons mentioned above, as well as the current conflict in Ukraine, which appears to be escalating by the hour, we believe that gold and silver deserve consideration in one’s portfolio. They have a low correlation to most other assets, offer one of the best inflation hedges available, and tend to move inversely to the value of the dollar, which can help to provide downside protection in the event the dollar falls relative to other major currencies.
For more information, contact Tony Davis at Atlanta Gold and Coin.
