Gold soars towards $1000 despite a lack of inflation

On Tuesday, September 15th I will be teaching a class on the current state of the economy, interest rates, real estate and gold. The three hour class will begin at 6pm and be held in Century City. I have been bullish on gold all year and the next four months should present an excellent opportunity to take advantage of a move over $1000. Long-term interest rates have entered their most favorable seasonal time of the year and could easily move to new lows. Seating is limited and advance registration is required.

For those unable to attend the live class I will be presenting a webinar on Tuesday, September 22nd from 6-8pm. Download the registration form here.

Despite the lack of inflation the price of gold rose $24 per ounce this morning and now resides only $20 from the ‘magic” resistance level of $1000. It has always been assumed that gold was the best hedge against future inflation but its 2009 rise has come despite declining price levels in the U.S. and many other countries. Could gold be rising because it has become a hedge against uncertainty about the future? And could that future be DEFLATION? Gold is also a great hedge against future dollar depreciation which might be the only way the U.S. can climb out of the deep hole created by the massive amount of debt that needs to be reduced before banks will be comfortable in lending again. It is likely that gold buyers are looking past the 3rd and 4th quarter bounce in the U.S. economy created by massive government stimulus and cash for clunkers program. Without massive federal government intervention the economy will continue to muddle through for the next four years as credit availability is near zero except for companies that are able to go into the marketplace and borrow (with implied government guarantees). Investors continue to be afraid of missing the next big move up in the stock market, real estate and commodities sure that the future will be a repeat of the past where every price decline was quickly followed by a swift advance back to previous levels. Markets have a way of disappointing the majority and frustrating everyone else. The one event that few are expecting is a slow, grind lower in the economy with periods of strength that don’t last long enough to make any serious profits. Friday’s jobs report will again show more losses and yet everyone will celebrate because the number is declining at a slower rate than six months ago. Population growth of between 125-150,000 per month gives us a break even level that we haven’t seen since the 215,000 increase in November 2007. There were only five months in 2007 that saw job growth that exceeded monthly population growth and there is no reason to believe we will return to those levels for at least the next 3-4 years. Jobs create income that is needed by consumers to spend on goods and services BUT those who have a job today want to pay down debt and save before considering non-discretionary expenditures. Confidence is something that takes years to build and can NOT be created because of a 5 month rally in U.S. stock prices. Lower long-term interest rates will help this process and the Fed will not have to worry about exiting from its current strategy for a long time because of a huge output gap in the economy. Those investors that have remained in cash this year are now able to take advantage of a few outstanding “back up the truck” opportunities that await in the final four months of this year.

Five nights a week at 10pm (Sunday-Thursday) I publish my thoughts on the economy, interest rates and market action. The following are a few of the highlights sent to subscribers in the past week. For subscription details please visit: http://www.earlywarningwire.com/pdf/nightlyemailflyer.pdf

9/01 – The Federal Reserve made a very subtle but important change on Tuesday regarding the mortgage securities it has been buying this year. Effective September 1 the Fed will be purchasing “on the run” securities that have just been issued and available in greater size. Before today’s change the purchases were limited to “off the run” securities that wouldn’t have the impact on interest rates. This change should have a bigger impact on mortgage rates after Fed purchases because on the run bond rates are used to set each day’s mortgage rates. http://www.newyorkfed.org/markets/gses_faq.html
If you are in the mortgage business you will want to read today’s release from the New York Fed.

8/31 – Monday’s Chicago Tribune reported on a DePaul University study of apartment building vacancy and rental rates. Vacancy apartment rates are normally 5% in Chicago but have doubled to 10% with tremendous pressure on rents. This story will be repeated in many major US cities this fall and winter due to a decrease in income levels and an increase in the supply of units on the market. http://www.chicagotribune.com/classified/realestate/chi-mon-rents-0831aug31,0,2346860.story

8/30 – Deflation is having a negative effect on California income taxes with higher tax brackets for lower income levels. Since 1982 California tax brackets have been indexed to inflation thus protecting taxpayers from paying more taxes because of inflation. Unfortunately declining price levels (deflation) have the opposite effect and the California CPI fell 1.5% in the 12 months ending June 2009. http://www.sacbee.com/topstories/story/2144898.html

8/27 – My theme has always been that we only see the future from our own past experiences and that we see the world as we NEED to not as it is. Homebuilders have always made money buying the first dip in land and real estate prices and like many real estate agents always see the real estate market from an optimistic viewpoint because that is how they make their living. A Bloomberg story reports that many homebuilders are back in the market buying land as they anticipate a rebound in the economy. The best quote from the article tells it all: “They have to keep building or they’ll die.” This is very similar to what I heard in 2008 from portfolio managers who were long and wrong all the way down in the stock market decline. They felt if they went to cash investors would pull their assets from them and they were better off being in the market with clients than out of the market without clients. A good portion of the recent stock advance has come from portfolio man agers that were afraid if they missed the advance they would lose clients. http://www.bloomberg.com/apps/news?pid=20670001&sid=aqTrfIx0BOgs

I look forward to seeing many readers at the Tuesday, September 15th class at 6pm.