Gold Investors to Hit the Tipping Point in the USA

Gold took quite a beating within September, bucking its seasonal typical monthly return of Two.3%. The political battle between President Barack Obama and Congress, China’utes Golden Week, and India’s gold import restrictions likely weighed on the metal.

September’s correction only adds to the negative emotion toward the precious metal. The assumption from many market pundits is that gold is no longer appealing as an investment. With increasing rates and continuing low rising cost of living, US investors believe they have a solid case for selling their holdings.

However, this could be a premature assessment, causing these bears in order to potentially lose out on a profitable position.

Allow me to use a piece of ice to explain.

One of the strongest drivers from the ‘fear trade’ is real rates of interest. Whenever a country has negative-to-low real prices of return, which means the inflationary rate (CPI) is greater than the current interest rate, gold tends to increase in that country’s currency. And our model tells us that the showing point for gold is whenever real interest rates go above the actual 2% mark.

Consider the ice dice, which shows how brand new equilibriums can have significant effects. At 0 degrees Celsius, H2O is really a solid chunk, but when the temperature increases, the mass gradually begins to turn into a liquid. Over 1 degree, ice modifications form from solid to fluid, but it’s still made of hydrogen and oxygen.

Because money is like water, when many other economic characteristics, such as population growth, urbanisation prices and changes in government policies, reach their tipping stage, the velocity of money tends to be altered.

As global investors, we watch for changes in these trends to understand how to invest in commodities and markets, find new possibilities and adjust for danger.

How Close to Gold’s Tipping Point Are US Investors?

In other phrases, what is the real interest rate today? As you can see below, US Treasury investors still lose money, as the 5-year bill produces 1.41 percent and inflation sits at 1.5 percent. This is nowhere near the 2% mark.

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I would be worried about gold in the event that real interest rates solidly crossed the 2% threshold for an extended amount of time, because it would have a dramatic effect on gold. as an asset class. In a high rate of interest environment, gold and silver lose their own attraction as a store of value.

In purchase for that tipping point to happen, rates would need to continue increasing above inflation, and rising cost of living would need to remain low. These are the forecasts made by many gold sellers today; however I wouldn’capital t get too trigger pleased just yet, as recent data problems these assumptions.

Take the monthly [US] joblessness figure, which is one of the primary indicators the Federal Reserve studies when evaluating the economy. But with respect to the definition of an unemployed person, the actual numbers reveal different results.

The recognized U3 unemployment rate, the exact figure Ben Bernanke uses, tracks the total unemployed as a percent of the civilian labour force.

The broadest gauge determined by the Bureau of Labor Statistics (BLS) is the U6 unemployment rate. For this number, the BLS adds in all those people who are slightly attached to the labour force, in addition people working part-time who want to work full-time.

What does ‘marginally attached to the work force’ mean? These people are neither working nor looking for work but show they want a job, are available to work and also have worked during some period in the last 12 months. These slightly attached people also include discouraged workers who are not looking for work because of some job-market related reason.

Then there’utes a measure of the labour market the BLS tracked prior to 94′. This is the seasonally-adjusted alternate unemployment rate that statistician John Williams continued to calculate. It’s basically the U6 plus long-term frustrated workers.

While the figures closely followed one another from 1994 through 2009, there’s recently been a shift. U3 and U6 have been popular downward over the past few years, while Williams’ ShadowStats unemployment rate shows the noticeably upward trajectory. Probably the official unemployment figure overstates the healthiness of the economy?

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Based on the jobs marketplace, a limited housing recovery and regulations that have been slowing down the flow of money, the Federal Book may have no choice however to raise rates very gradually to keep stimulating the economy.

Figures Don’t Lie, But Liars Figure

Then there’s the suggestion of inflation manipulation. Even though the US has been reporting a reduced inflation number, things feel more expensive to many Americans. Disposable income has been growing less than inflation in recent years; perhaps that’s why many people feel ‘squeezed’.

Also consider Williams’ graph below. It shows month-to-month inflation data going back for more than a century. The blue and gray shaded areas represent BLS’ historical Consumer Price Index (CPI).

You can clearly begin to see the wild swings of rising cost of living and deflation, especially during the First World War, the Great Depression, and the Second World War, as well as the stagflation of the 1970s and early 1980s.

However, shortly after disco, bell bottoms, and episodes of All within the Family faded from memory, the united states adjusted CPI not once however twice, first in the early 1980s and again in the mid-1990s. If you use the pre-1982 calculation, you end up with a much different inflation picture. This really is the area shaded in red-colored.

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Way back in 1889, statistician Carroll D. Wright, within addressing the Convention associated with Commissioners of Bureaus of Figures of Labor, talked about the unbiased and fearless presentation of its data, using the above play on phrases. He said:

‘The old saying is that ‘figures will not lie,’ but a new saying is ‘liars will figure.’ It is our duty, because practical statisticians, to prevent the liar through figuring; in other words, to prevent him through perverting the truth, in the interest associated with some theory he desires to establish.‘

Wright’s speech seems particularly relevant today.

For patient, long-term traders looking for a great portfolio diversifier, an average weighting in gold and precious metal stocks may be just the solution. And, today, when looking over the gold mining industry, you’lmost all find plenty of companies that have compensated attractive dividends, many higher than the [US] 5-year government yield.

Frank Holmes
Contributing Publisher, Money Morning

Publisher’s Note: Figures Don’t Lie, But Liars Figure initially appeared in The Daily Reckoning USA