Sunday Observations on the Economy, Inflation, Gold, etc...

The first "cut" of Q1 2010 estimated GDP was released on Friday. It came in slighly below expectations at a 3.2% annualized rate. This number will be revised a couple times over the next of couple months. Don't forget that because the Govt underestimates true inflation, any estimated GDP statistic is mathematically skewed too high. That said, Q1 GDP was mostly fueled by consumer spending, which was financed by the trillions tossed into the system by the Government over the past 18 months. This is low-grade, unsustainable growth, given the persistence of rising unemployment, flat disposable income, and the ongoing deterioration in basic manufacturing and homebuilding:

Real disposable incomes were flat, the data showed. And after having risen in the third and fourth quarters, investments in homes reverted, falling at a 10.9% annual rate. Investments in business structures dropped at a 14% rate, the seventh straight decline. Spending by state and local governments fell 3.8%, the largest decline in 29 years. Export growth slowed.  LINK

It is becoming more apparent that basic economic indicators are starting to head south again. It will be interesting to watch how the expiration of the homebuyer tax credit affects the real estate industry. Watch out for rising foreclosures, bank failures and a concerted Govt/Wall Street attempt to hide the mushrooming credit problems endemic in our system.

High quality, sustainable economic growth is fueled by capital formation - high savings, basic industrial investing, jobs formation - none of which is occurring in this country right now, nor can it occur in an environment of high Government deficits, massive Government debt issuance and continued Government/Central Bank policy which incentivizes businesses to move offshore and offers the banking system the ability to create huge paper profits by engaging in broad financial manipulation (carry-trade, derivatives, mark-to-fantasy accounting). And the middle class is disappearing: A Country of Growing Serfdom.

What was NOT being reported - either out of ignorance, denial or suppression of the facts - was the incipient price inflation that is building in the system - inflation in food and energy, both of which the Government considers "non-core" items. On April 22, the Producer Price Index was released and was substantially higher than consensus estimates.  Food and energy were the culprits. Of course Bloomberg reported that "at the core level, inflation is almost nonexistent outside of commodities related gains."

And on Friday the Chicago Purchasing Managers Index was higher than expected. While CNBC and Bloomberg cheered on the overall number, if you looked at the components you would find that "input prices" are rising with prices paid up nearly 5 points to 71.4 (on the index). Little attention paid to the rising prices at the grocery store and gas pump, but expect that inflation will begin to accelerate, regardless of whether or not the Government accurately and honestly reports it. I wonder what affect the British Petroleum oil disaster will have on gasoline prices - anyone notice gasoline prices climbing over $3/gallon for premium octanes?

Then there's gold/silver. Gold has been in a remarkable and persistent bull market since 2000, after England's Gordon Brown dumped 400 tonnes of British gold onto the market in order to supress the price. Nice trade, Gordie! LOL. This bull market has received little attention outside of the narrow world of financial blogs and chatboards - and it has been aggressively denied by the financial advisory industry (i.e. your trusty little golf ball/fancy dinner investment advisor). 

As Europe and the United States put increasing stress on the ability of the rest of the world to continue funding the massive spending deficits, reckless Government/Central Bank fiscal and monetary policies and financial fraud, many countries are aggressively accumulating large amounts of physical gold and silver. My guess is that CNBC or your local newspaper did not report this story, but the demand for gold by India for its spring festival season this year is up 25-30% over last year. Here's the link: India Hoovers Gold.

And you have seen from previous posts on this blog, Russia and China have been accumulating a massive amount of gold - the Governments of both countries and now the citizens in China (gold and silver). China has implemented public policy measures which encourage and incentivize its citizens to use their savings to buy gold and silver. In the United States, on the other hand, "cash for gold" ads proliferate and can been seen especially during expensive advertising time slots on prime time t.v., indicating that the hoi polloi in this country are still eagerly selling their precious metals.

The price of gold has been hitting new all-time highs in the euro and the British pound on a persistent basis. It just hit a new dollar high for 2010 in the on Friday. Gold has gone up over 450% since 2001, 16% per year on average every year, and it has done this without the benefit of much inflation - price inflation that is. As the financial/economic problems of the west (Europe/United States) continue to accelerate, so too will the creation of paper money as the expedient method chosen to try and address them. In turn that will fuel the increasing distrust of Governments and their fiat currencies and throw gasoline on the flames of inflation - both of which will result in a price move by gold, silver and mining stocks that will completely shock all but the most ardent proponents of using gold as the backbone of the global economic/financial system.

Think about the affect on the price of gold and silver as the big institutional pools of money in the United States begin to move just 5-10% of their money into physical gold and silver (Northwest Mutual announced the purchase fo $400 million of gold bullion last year). This will occur as the sophisticated investment managers in this country begin to understand the fundamental problems with GLD and SLV (one large, sophisticated hedge fund with gold as its 2nd largest position announced that it sold its GLD and purchased physical gold instead last summer). The biggest moves in gold and silver are yet come.