Protection Through the Standards in Double Dip: Gold, Silver

by: George Maniere

Today I am going to do something really amazing. I am going to tell you that in my opinion the U.S. economy has not entered a second recession, it never came out of the first one. Well before you professional economists start writing me that the Webster’s definition of a recession is two consecutive quarters of negative growth, I will simply say for who? Indeed, there are many Americans who have been so economically ravaged by this crisis that they have not lived through a recession - they have endured a depression. A Gallup poll that was released in April (when the DOW was 800 points higher than today’s close) said that 29% of the people polled didn’t care what the definition of a recession was. They said they were in a depression. Add to that, another 26% polled said that they felt they had never come out of the original recession.

Please ask yourself if it is any wonder that most Americans believe that an economic downturn is still in progress? One only has to look around to see all the evidence they need to draw that conclusion. Home prices are at levels we have not seen since 2002 and add to that in many parts of the country like Florida, California, Nevada and Arizona values of homes have dropped a staggering 50 percent. According to the National Association of Realtors home prices will likely drop another 10 % nationwide. They also reported a staggering statistic. If you had bought a home under the program set forth by President Obama that gave you $8500.00 towards the purchase of a home, and if you had put down an additional 20% towards the purchase of the home, you would now be underwater on your mortgage.

It is painfully evident to most average Americans that there are signs that a full blown recession is firmly in place. I guess it is harder for the myriad of professional economists hired by the Fed to see the forest for the trees.

In my opinion there is nothing that damages the confidence of a consumer as badly as rapidly rising prices. When I am not writing my posts I have the dubious distinction of doing the heavy grocery shopping for my family. I have been amazed and appalled at the spike in the price of groceries. A pound of coffee that used to cost $2.99 now costs $6.00. Milk is almost $5.00 a gallon. My children are grown and my wife and I don’t drink milk but as I walk by the dairy aisle I keep an eye on the price of milk because I often wonder how parents with children can afford to buy milk. Clothing has gone through the roof as cotton prices nearly doubled in 2010. The consumer’s ability to buy the most basic clothing necessities has been undermined.

While the auto industry has staged an impressive comeback, much of its profitability has been based on layoffs as much as new car sales. Slower car sales are not only a sign of lagging consumer confidence but also a sign of tougher times ahead. Car firms have only just begun to hire again but that trend will die as the sales of cars plateau.

The circus that took place over raising the debt ceiling is going to make it very difficult for Dr. Bernanke to institute another round of quantitative easing. He will have to be more stealthy in his approach because while the FOMC remains tight lipped many prominent economists like Nobel Prize winner Paul Krugman say another round of quantitative easing is essential to create a full recovery. His theory has seemingly been borne out by last week’s GDP numbers, which had a revised estimate of 0.04% for the first quarter and a 1.4% estimate for the second quarter. For a robust economy, I have read that economists see the need for a minimum of 5% GDP. The debt ceiling agreement has caused a call to arms for severe austerity measures, which is exactly what our already fragile economy does not need. The fact is that people are afraid and they have tightened their belts and are saving every penny they can. While a healthy savings plan is the watchword of a healthy society, I’m sure the Feds wished that the American people practiced this kind of economic restraint on somebody else’s watch. What the Feds need are the American people spending to stimulate the economy. It certainly is a Catch -22 situation. Add to this that today’s employment numbers promise to be anemic as Cisco (NASDAQ:CSCO) has said they would lay off 6,000 people, HSBC (HBC) has promised to lay off 2,000 people and state and local governments have said it is their intention to trim the payrolls by 450,000 jobs this year and next. These government cuts are already well underway. One can barely open a local newspaper without reading of battles between state unions and governors over employment, benefits and pensions.

A slowdown in the Chinese economy is usually seen as a cause of global commodity price inflation, but this coin has two sides. While China’s appetite for energy and raw materials may fall, the demand for goods and services by its very large and growing middle class drop along with it. As China has raised the interest rate in an effort to slow down the exploding growth rate the U.S. exports to China have also fallen. According to the U.S. - China Business Council, over the last decade we have seen exports to China grow from $16.2 Billion to $91.9 billion a staggering 468% increase. However, as that rate slows it has a profound impact on tens of thousands of American companies and their employees. U.S. firms with large operations in China are also affected. General Motors (NYSE:GM) is one of the two largest car firms in China along with VW (OTCPK:VLKAF). Large U.S. corporations like Wal-Mart (NYSE:WMT) and Yum Brands (NYSE:YUM) rely heavily on China to boost global sales. Without vibrant consumer spending in China, American companies suffer.

Unemployment creates two problems. People without jobs drastically curtail their spending, which ultimately affects GDP growth and secondly is the need for tens of billions of dollars every year in government aid to keep the unemployed from becoming destitute. That support has increased deficits and the domino effect is that cash-strapped governments need to make more spending cuts. The continued high rate of unemployment may well be the biggest challenge the economy faces.

Unemployment has worsened because people over 65 continue to work because their homes, which were once thought of as the financial base of their retirements, have dropped so sharply. Older Americans also fear that cuts in Medicare and Social Security are inevitable, which will increase the cost of their “golden years.”

The worst part of the unemployment problem is the roughly 5 million Americans that have been unemployed for over a year. Their unemployment benefits, in many cases, may have run out. The burden of their care falls to their families, friends and community organizations. To the extent that the federal or state governments can support the unemployed, the cost to run support programs increases.

Housing is considered by many economists to be the single largest drag on the American economy and the housing market has gotten much worse in the last three months. Whether right or wrong, the American home was the rock that families built their economic future on. It was the primary source of equity that was used for college educations, car purchases and ultimately retirements. While this may once have been true, the drop in home prices wiped out the equity that many people saw as their life savings overnight. Their ability to consume was severely damaged, further harming the GDP. High mortgage payments bankrupted people who had lost their jobs or have found that their incomes had stagnated. The building Industry became a shambles overnight. Whatever the effects have been over the last three years, they are getting progressively worse as home values drop to unprecedented lows. Sadly, there is no relief in sight because potential buyers perceive that the price erosion of a home has not come close to ending.

So in conclusion, while I reread this essay, it certainly paints a very bleak picture. You may rightly ask where the harbor is. In which direction do I set my compass? The answer is the same as it has always been – follow the money. China, India and Brazil all continue to amass large amounts of physical gold and silver. Several days ago it was reported that South Korea had bought $1 billion dollars worth of gold. Even the people of Greece who are bankrupt are taking what little paper money they have and buying gold and silver.

I would advise my readers to continue to look for opportunities to open positions in gold and silver. While I have been amazed by the parabolic run in gold and there are a lot of people that say gold which was had a target price of $1,600.00 an ounce has blown through that level and seems to have no intention of correcting. Indeed, I read several analysts report that we may see gold reaching $2,500.00 an ounce before it pauses. While my Instincts tell me that the probability for this is remote my brain tells me to follow the money. As global currencies are debased and global fears continue to grow it seems that this shiny yellow metal will continue to rise. Let us not forget its baby bother silver which has broken the $40.04 resistance level and seems on its way to my predicted level of $55.00 - $60.00 by year’s end. I had a reader chide me yesterday that my $55.00 level was ridiculous. Silver would be $100.00 an ounce by the year’s end. So look for the Silver ETF (NYSEARCA:SLV) to pull back to $38.00. If it does pullback to $38.00 buy in there. I’m not sure how to advise you on the gold ETF (NYSEARCA:GLD). As I have already written the levels that GLD are trading seem over bought but I see no red lights in front of it. I would advise that you stand aside until there is more certainty. I am fond of quoting Doug Kass who likes to say “I would rather lose an opportunity than lose capital.” In the mean time don’t forget about the miners. There are still great opportunities in these stocks as gold and silver under the ground have continued to lag gold and silver above the ground. Some names that continue to stand out are Silver Wheaton (SLW), Barrick (NYSE:ABX), Goldcorp (NYSE:GG) and for a longer term investment U.S. Gold (NYSE:UXG) have significant upside potential.

Disclosure: I am long GLD, SLV, ABX, GG, UXG, SLW.