The Overlooked X Factor in the Gold Price

Goldman Sachs created a stir recently if this forecasted that gold would fall to $1,000 an ounce after 2014, as the firm expected the Federal Reserve to reduce its bond purchasing program. Goldman also suggested which gold miners might want to hedge their output, locking in 2013 costs.

HSBC analysts have also been bearish on gold, even though the firm admits that lower gold prices tend to draw out tremendous need from emerging markets, particularly China. Because of that demand, HSBC believes gold will end 2014 at about $1,435 an ounce, says MarketWatch.

Keep in mind that ‘Goldman Sachs will things that are good for Goldman, not you,‘ says Byron King through Agora Financial. Things can alter quickly in the gold marketplace, as investors saw whenever, only days after Goldman’utes assertion, the Federal Reserve shocked everyone by announcing it would continue purchasing $85 billion worth of bonds. Gold investors cheered because the precious metal shot up the most in 15 months.

Unlike many commodities, there are many shades to gold, such as the Love Trade’s buying gold for loved ones and also the Fear Trade’s purchasing gold as a store of value. An extra ‘shade’ investors need to be aware of is when the Fed interprets the recuperation of the US economy.

I had a few reasons to believe Ben Bernanke was going to pull the rug out from under the market’s feet. Before word came out, I told Canada’s Business News Network that the ending of quantitative easing was not going to be abrupt because it’s not a black and white problem.

Consider the lack of significant job growth in the US, as many of the jobs that have been created in recent history had been part-time positions. Investor’s Business Every day (IBD) links this lackluster employment situation to President Barack Obama’s Affordable Care Act.

According to the publication’utes scorecard, ‘more than 300 employers have cut work hours or jobs, or otherwise shifted away from full-time staff, to limit liability under ObamaCare.‘ Whilst providing affordable health care to Americans sounds honourable, the loss of full-time jobs seems to be an unintended consequence from the burdensome regulations placed upon a business.

Take a glance at IBD’s chart, which exhibits the accommodations industry’s typical weekly hours that nonsupervisors put in since 2000. During each economic downturn, in 2001 and again in 2008 to 2009, the hours dropped.

But since ObamaCare was authorized into law, which mandated that employers would need to provide health care coverage for staff that work more than 30 hrs a week, the average plummeted. As of July, the lodging industry workweek hit 28.8 hours, ‘at a record low,‘ in accordance to IBD.

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It’s not only about job growth. Housing is also not rebounding as strongly as some people think. I told Reuters that many people don’t realise that the real estate marketplace boom has been narrowly targeted.

According to USA Today, almost half of the houses purchased in July were bought with cold hard cash. Within places like Florida, ‘nearly two-thirds of home sales were completed with no mortgage loan,‘ says USA Today.

In Nevada, about 65 percent of buyers paid with cash, followed by Maine, where nearly 60 percent of house sales were cash. Perhaps regulation in the banking industry has made the process of getting a mortgage as well burdensome for families?

Housing is one of the biggest multipliers for jobs, exactly where $1 spent in housing results in about $16 in related economic activity. When rates of interest are low, more people make an application for mortgages. They build houses, employ moving services and buy new furniture, which in turn employs more people within multiple industries.

But after interest prices rose quickly, the housing market came to a halt. People who once qualified for a mortgage to build a new home no longer qualify at the higher rates, which means a potential inventory of new real estate may quickly build.

At the same time, big banks are announcing layoffs in mortgage loan lending. Wells Fargo announced it was likely to lay off 1,800 workers as refinancing activity continues in order to slow. The company had currently told 2,300 workers to stop coming to work as rising interest rates curtail demand for brand new mortgages and refinancing.

So instead of the Fed quickly declining its bond purchases and raising rates, this process will likely be very gradual. I believe the federal government will have to keep interest rates low to stimulate the economic climate.

And that’s positive for equity marketplaces as well as for gold. If interest rates remain low, real rates might remain in negative territory.

In my personal presentation on opportunities in resources and emerging markets, We told the crowd at the Greater toronto area Resource Investment Conference which 2% has been the tipping point with regard to gold. Historically, gold and silver carried out well in a low or negative real interest rate environment.

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Regardless of where analysts think the actual gold price will be a 12 months from now, we believe gold and gold stocks can be an superb portfolio diversifier. We’d rather maintain quality gold companies that are experiencing a growth in resource base, development in production and growth in cash flow instead of trying to time the market.
 
Frank Holmes
CEO and Chief Investment Official, U.S. Global Investors

[U.Utes. Global Investors, Inc. is definitely an investment management firm focusing in gold, natural sources, emerging markets and worldwide infrastructure opportunities around the world. The company, headquartered in Dallas, Texas, manages 13 no-load mutual funds in the U.S. Worldwide Investors fund family, in addition to funds for international customers.]

Publisher’s Note: The Gold Market’utes Overlooked X Factor originally appeared in The Daily Reckoning USA