It’s a Gold-Buyer’s Paradise
by Jason Simpkins, Outsiders Club There’s a lot of uncertainty in the world, but one thing is for sure… Gold remains the only true, reliable store of value on the planet. Look around right now and there’s not a single piece of paper out there that you can trust. Not the euro, not the yen, not the renminbi, and no, not the dollar. See, a lot has been made of the dollar’s recent rebound. And that’s fair enough. It has strengthened considerably over the past year. Problem is, the dollar hasn’t gathered steam because America’s economy is fundamentally sound. The dollar has made gains because 1) all other developed markets in the world are devaluing their respective currencies; and 2) traders continue to anticipate the Federal Reserve will raise interest rates relatively soon. Sometimes a stock, a commodity, or a currency can go up for the wrong reason. And that’s the case here. I wish the dollar were rising because the U.S. economy was the same manufacturing powerhouse it was 75 years ago. But it’s not. It’s rising, in a sense, by default. And that can only go on for so long. That’s why gold is so essential. When the disconnect between the dollar and the rest of the world becomes too much to bear, and when the Federal Reserve can no longer keep teasing us with rate hikes, gold will be what’s left standing. Here, I can explain more… Trust No One First, take a look at the U.S. economy… Growth in the first quarter was negative. I know, the preliminary estimate from the BEA showed 0.2% growth, but that’s just the advanced estimate. Those always get revised one way or another, and this one is going to get revised down. How do I know that? Because the initial GDP estimate projected a $45.2 billion trade deficit for the country when, in fact, the trade gap grew to $51.4 billion. Other measures, like retail sales and consumer confidence, have been bad as well. There are many different reasons for these setbacks, but one of the biggest is global monetary policy, which is being loosened everywhere but here. Just last week, China cut its interest rate by 0.25% to 5.1%. It was the third cut in six months. Remember how crazy it was when China’s GDP was blasting off at a 13% clip? Well, that’s over now. Last year’s 7.4% growth rate was down from 7.7% in 2013. And policymakers in Beijing are all talking about coming to terms with a “new normal” of more restrained growth. Still, China has big dreams and a large population that needs jobs, so it’s going to keep manipulating its currency to maintain a manufacturing and export advantage over its global competitors. U.S. imports from China were up 32% in March. Europe is pushing even harder. The ECB decided in January that it would buy $66.7 billion of government bonds per month through the end of September 2016, or until inflation was sustained at 2%. This is how the euro has performed as a result…
As you can see, it’s enjoyed a slight rebound against the dollar since April. That’s because a slowing U.S. economy has traders second-guessing the Fed’s resolve to raise interest rates.
That makes a lot of sense. If the U.S. economy is wheezing along right now, how would it respond if the Fed followed through with higher interest rates? Not well.
That’s the dichotomy I was referring to earlier. The U.S. economy is weakening, and is likely to weaken further. But the dollar is strengthening.
Ultimately, we have two choices:
- Raise rates, take the hit, and drive our economy further into the red.
- Or rejoin the rest of the world in the race to the bottom.
They’re not appealing options.
But again, that’s why God made gold.
I can’t tell you what the Fed will do, or exactly what will happen as a result. But you’d be crazy to blindly assume that the U.S. economy, the stock market, and the dollar will just keep on rising.
It doesn’t work like that. Markets don’t move in just one direction.
We’re six years into a bull market that’s delivered higher valuations than most companies deserve. We’re a year and a half into a dollar rally that’s really starting to bite. And we’ve got an economy that’s been struggling to regain its balance ever since the Fed took off its training wheels.
Not so sure about what to do?
Buy gold. It’s cheaper than it’s been in years and it’s cheaper than it will be years from now.