Deflation Risk: Good for Gold

Massive sovereign debt loads, yawning budget deficits and high unemployment in the developed world raise the chances of deflation in 2010. If deflation were to occur, it could be good for gold. I have written about deflation in the past, but it’s such an important theme that it warrants a revisit. I see it as a key risk to the global economy — a far greater risk than inflation in the near term. Deflation is especially risky because, once under way, it’s a cycle that’s hard to break. In the U.S., for example, slow economic activity and high joblessness (currently around 10 percent) can drive down prices, which leads people to delay spending because they think prices will keep falling. This further slows economic activity, which leads to more joblessness, and around and around it goes. The competitive effects of globalization add to the deflation risk. Labor is getting ever cheaper in a worldwide jobs market, and excess global capacity continues to lower production costs. An article from the Federal Reserve Bank of San Francisco offers an excellent discussion of deflation risk based on studies of the Great Depression and the late 1990s in Japan. According to an analysis detailed in that article, there’s an 85 percent chance of deflation in the U.S. this year. Read Article* Governments are keeping capital cheap — interest rates are near zero and will be for a long time. U.S. banks have a lot of money to lend, but we don’t see that happening based on measures of money velocity. And given the enormity of government debt loads, future fiscal and monetary options are limited — not that the White House and Congress won’t be tempted to provide desperation stimulus as the 2010 midterm elections draw closer. In the face of low or no domestic growth, the U.S. and other countries can be expected to engage in a competitive spiral of currency devaluation to increase exports. This race to the bottom stands to lift gold as investors seek to store their wealth in an asset with tangible value. *By clicking the link, you will be redirected to FRBSF.org. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. #10-118

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Frank Holmes - U.S. Global Investors | February 18, 2010 | 10:00 pm

In America We Trust

A financial crisis and a polarizing debate on social and political issues may have Americans down, but they are not out. A new Gallup/USA Today poll shows that most Americans expect good things are coming — when asked how they feel about the next 20 years, nearly two-thirds of survey respondents said they were optimistic. Asked why, 35 percent answered the “strength/will of the American people.” In addition, more than six in 10 respondents said they believe today’s children will have a better life than their parents. This positive outlook on the future is consistent with the response to a question that the Gallup Poll has asked periodically for the past 50 years. Americans now rate their country’s standing as a 5 on a scale of 1 to 10, with 10 being the best. The bad news is that this result was just above the all-time low of 4.8 during the Watergate scandal. Better news — the forecast is that the U.S. will climb to 5.7 by 2015. One thing many people may have to look forward to is an improving job market. More jobs are still being lost than created, but the chart below shows that the trend is better than we’ve seen since the beginning of 2008. I’ve said many times that the government’s main focus should be on creating jobs. Once people get back to work and feel confident they can fulfill the needs of their family, economic activity will pick up. With their resilience, Americans are setting a great example for the emerging world. In India, China, Brazil and dozens of other countries, ambitious people are creating better lives for themselves and their children. These children will go on to provide new opportunities for their own children—just like what happened in the United States in decades past. The Chinese and the Indians and the Brazilians will get knocked down along the way, but their strong belief in what we call “the American Dream” will help them get up and continue to prosper. #10-115

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Frank Holmes - U.S. Global Investors | February 17, 2010 | 10:00 pm