The economic recovery is not what it appears. Through smoke and mirrors, the government has been able to mislead many Americans into believing that we’re on sustainable path to continued job growth, economic expansion and a healthy housing market. This false sense of confidence has resulted in relatively healthy spending levels over the past couple of years, but we’re starting to see cracks in the foundation, which are reason for concern. In fact, the further you delve, the more you realize that we may be close to a tipping point. While there are a number of economic factors and data that we could point to that reveals a less than healthy economy, we thought that three figures, in particular, help to paint the true economic landscape, and remind us why gold, maybe now more than ever, remains a solid investment.
GDP figures were recently released and reveal that the economy grew by a whopping .1% during the first quarter of 2014! Considering that the consensus among economists is a 2.5% growth rate during 2014, the economy will need to grow by 3.5% over the next three quarters to reach this level. When you look at the economic landscape for a catalyst that will help to bolster stronger than expected growth over the next three quarters, you will be hard pressed to find one. Interest rates are already at a historic low and the level of lending is nominal, at best. In fact, most major banks have made the choice to park their excess reserves at the Federal Reserve earning a paltry .25% annual interest rate in lieu of lending to individuals and companies. When you consider the potential margin of error in the government’s data, it’s quite possible that we actually experienced contraction during the first quarter and that we could be one quarter away from officially entering into a recession.
For all the talk of a strong and healthy housing market, it was recently revealed that 43% of homes are cash purchases, which means that the housing market is being supported by private equity funds, investors, and wealthy individuals. This is not exactly the recipe for the long term success of the housing market. Furthermore, home ownership is currently at a 19 year low; this, at a time when mortgage rates have recently seen an all-time low. This leads us to believe that many individuals are still unable to afford the minimum 20% needed for a down payment. Furthermore, as housing prices continue to advance, due to increasing asset prices, affordability will continue to remain out of reach for most of Main Street.
The Bureau of Labor Statistics recently released April’s jobs report, and announced that 288,000 new jobs were created, which blew away consensus forecasts of 220,000 new jobs. This was a phenomenal report and revealed that the job market is its strongest in years…or is it? While investors were paying attention to the headlines, further analysis revealed that 806,000 individuals dropped out of the workforce, reducing the participation rate from 63.2% to 62.8%, which is the lowest rate since January 1978! Furthermore, many of the new jobs created were lower paid service and retail jobs. Additionally, since assumed birth and death rates are factored into the jobs report, it’s quite possible that the level of new jobs created during the month was overstated by a large margin. Stated directly, a reduction in the unemployment rate from 6.6% to 6.3%, while simultaneously seeing the jobs participation rate drop to nearly an all-time low is inconsistent, and reveals at best, a shaky jobs market.
We’ve revealed three reasons why the economic recovery is not what it seems, and quite to the contrary, may near the tipping point of a contraction and recession. That begs the question – why should you consider an investment in gold at this point in time? Gold tends to do well during periods of uncertainty and instability, which we very well could be experiencing in the near future. Secondly, gold serves as a hedge against inflation and a depreciating currency. While inflation has been relatively tame so far this year, it is creeping up, and could take off if banks step up their lending efforts. However, we believe that a depreciating dollar as a result of continued monetary expansion is more likely. The strength of the dollar historically has been inversely correlated to precious metals. Additionally, gold has performed well during geopolitical conflict. If military conflict erupts while Eastern Ukraine attempts to secede from Ukraine, we could see an intense and prolonged war, which will create further uncertainty. And last, but not least, the current price of gold is near production costs, which means that there appears to be minimal downside risk and unlimited upside potential.