How Do We Protect Ourselves From a Double Dip?
Evidence is mounting that the economy still hasn't emerged from the original recession, and it seems the only safe haven left is precious metals.
Unemployment creates two problems:
- People without jobs drastically curtail their spending, which ultimately affects GDP growth.
- There comes a 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 the age of 65 continue to work as 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 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 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 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 found that their incomes had stagnated. 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.
Conclusion: Buy Precious Metals
This all certainly paints a very bleak picture. You may rightly ask, "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 those who are bankrupt in Greece are taking what little paper money they have and buying gold and silver.
I will continue to look for opportunities to open positions in gold and silver. While I have been amazed by the parabolic run in gold, there are a lot of people that say the metal -- which was had a target price of $1,600 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 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 $55-60 by year’s end. I've been told that my $55 level is ridiculous and that silver would be $100 an ounce by the year’s end. So look for the iShares Silver Trust (SLV) to pull back to $38. If it does, that may be a good place to buy in. As I have already written, the levels that SPDR Gold Shares (GLD) are trading seem overbought but I see no red lights in front of it. I would 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 meantime 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. Some names that continue to stand out with potential upside are Silver Wheaton (SLW), Barrick (ABX), Goldcorp (GG), and for a longer term investment US Gold (UXG).
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.