U.S. economic prospects and the price of gold - an appraisal

According to gold expert Jeff Nichols, the current signs of growth in the economy announced in the latest Fed minutes may not be as good as they sound. He believes that gold prices will once again resume their path on an upward trend and investors should buy gold now before its too late.

Author: Lawrence Williams
Posted: Wednesday , 04 Apr 2012

Yesterday, the gold price took yet another knock on publication of the latest U.S. Fed meeting minutes which seemed to confirm Ben Bernanke's February 29th interpreted opinion that the U.S. economy may be doing better than anticipated and further rounds of excessive monetary stimulus (Quantitative Easing) may not be necessary. And traders have taken this as a sign that interest in gold will wane as the economy picks up with a sharp gold price fall immediately the minutes were released.

Gold commentator Jeff Nichols, Senior Economic Advisor to Rosland Capital and Managing Director of American Precious Metals Advisors disagrees and has come up with half a dozen reasons why he feels that this is not the case and that the U.S. ‘recovery' is not all it seems to be, and that in any case gold does not necessarily need continued QE to keep rising as there are a number of other factors at play here too. On U.S. economic growth he avers:

1. Despite the recent improvement in some of the economic indicators, the U.S. economy remains vulnerable to a renewed and visible setback in business activity and employment.
2. The unusually mild winter across the United States together with inaccurate seasonal adjustments has painted an overly rosy picture of recent U.S. economic performance.
3. In addition, slowing business activity in Europe, China, India, Latin America and virtually everywhere else is cutting demand for American exports.
4. Meanwhile, higher petroleum and gasoline prices are taxing the American consumer and cutting into purchases of other goods and services.
5. In past business cycles, a recessionary economy would generally be countered by aggressive short-term fiscal stimulus. But U.S. fiscal policy is moving in the opposite direction - and it is likely to continue in the wrong direction at least until the November national elections.
6. In addition, election-year uncertainties, a depressed housing sector, cutbacks in state and local government spending, more public-sector lay-offs, and the heavy burden of debt will continue to take its toll.

To these I would add another point. Last year's U.S. industrial growth was helped by a number of special government stimuli on purchasing U.S.-manufactured products which have fallen away, at least in part, at the beginning of 2012, and while these may have been effective in giving the economy a kick-start this year's growth prospects may not be as strong without them. A huge amount of effort has gone into convincing the general population that things are indeed looking up - as we have said before perception that times are getting better is vital in persuading people to regenerate their profligate spending patterns and thus boost economic growth. But, a number of the factors noted above may well put a dent in this this year.

Nichols goes on to note that "More fundamentally, the American economy must still pay its dues for many years of excessive and imprudent spending - years in which the private and public sectors both spent much more than we could afford, on things we didn't need, and, worst of all, with money we didn't have. As a result, we are continuing to suffer from the heavy burden of unprecedented public and private debt - and it will be years before this debt ceases to be a barrier to adequate rates of real economic growth.

"America's inability to get its fiscal house in order will continue to compel the Fed to pursue an aggressive accommodative monetary policy. But printing more money will, sooner or later, result in a resumption of the U.S. dollar's long-term downtrend both at home and overseas . . . and, as night follows day, a substantial and unprecedented appreciation of the dollar-denominated gold price.

"Although they would never say so, the Federal Reserve and U.S. Treasury may be quite happy to see a weaker dollar and somewhat higher rate of domestic price inflation.

"A few years of higher inflation would reduce the real value of America's debt as a percentage of nominal GDP, and bring the ratio of debt-to-GDP back down to historically acceptable norms. And, conventional economic theory says a weaker dollar would stimulate the U.S. economy by boosting exports and restraining imports."

Nichols is thus confident in his opinion that gold is still to move higher - even if he is proved wrong on his doubts about U.S. economic growth and Fed policy. There are a number of fundamentals he points to which are all likely continue to keep gold on the upward path and have been well highlighted by Nichols and others in the past. These include continued growth in Chinese gold demand and Central Bank demand, further European economic disintegration, and insufficient growth in world mined gold production. All these can contribute to a continuing strong outlook for the yellow metal.

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