Gold Holds Tight As More Signs Hint of Another 2008

Gold slides a little on profit taking, after its $60-plus jump from yesterday’s low-to-high.

Bullion.Directory precious metals analysis 2 December, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Gold reached levels not seen since the Lehman Brothers bankruptcy in 2008, and silver hit several multi-year lows on heavy dollar bullishness. This was a core scenario back in 2008, but it is something very few media outlets have covered. For months now, I have been voicing concerns that 2014 is shaping up to be a lot like 2008. First, it began with the stark performance of gold and silver with bouts of heavy selling.  Societe Generale has issued a memo stating US equities are “super expensive.”

Another reoccurring theme is a collapse in oil prices. Prices have been collapsing prior to OPEC’s decision not to cut production. Prices were already down over 30 percent from the yearly high on increasing supplies coupled with little demand. The decision by OPEC added fuel to the fire, as OPEC is looking to squeeze US shale producers and force a cut in their production. This could shape up into a catastrophic event. US shale producers are highly levered and have large debt burdens. In fact, oil companies represent 20 percent of Credit Swiss’ high-yield credit index, and this debt is loaded on fund and banking books hoping to get yield during the Fed’s endless ZIRP policies. If the situation gets much worse, it could potentially strike a credit crisis. Some analysts are forecasting $35 per barrel, which is what we saw during the Great Recession. The collapse in crude pulled equities down with it. No demand in crude equates to a weakened global economy. Forget what mainstream analysts believe. Lower crude prices are not indicative of more consumer spending. (Check out my near-term oil forecast).

Inflation has been lower than what central bankers would have hoped for. Their trillions in stimulus money could not prop up consumer spending, or aggregate demand (demand for final goods and services). The Federal Reserve, and other central banks, have this notion that with rising consumer prices, the consumer will spend now in order to avoid paying higher prices. But, that is not happening, and it is causing disinflation in the US and China and near-deflationary circumstances in Europe. The most recent University of Michigan inflation expectations are at multi-year lows. The longer-term (five-year) projection collapsed under one-percent and was the lowest reading since 2008. In 2009, the US was in deflation and forced the Federal Reserve to induce reckless monetary policies. This was ultra-bullish for gold and silver, which either reached or met all-time highs. We are likely to witness this again in the near-future. It would be unfathomable for the Fed to allow deflation.

The US government is insolvent, the Fed is insolvent. That would be too costly. The US public debt has now reached $18 trillion, up over 70 percent under President Barrack Obama. It also has the sixth-highest debt-to-GDP ration in the world, behind Japan, Greece, Italy, Portugal and Singapore.

Now, according to ZeroHedge, Citi’s US Macro Surprise Index is at the lowest levels since since 2008. The combination of mediocre economic data and overly-bullish economists has left much to be desired. Growth following the 2009 recession, and subsequent Fed policies, has been a modest 2-to-2.2 percent year-over-year. Even with the Q2 GDP coming in at over four percent and Q3 GDP revised higher to 3.9 percent, on a year-over-year basis, the US is expecting growth expansion of 2.4 percent. This is well, well-below economist hopes for three percent. In fact, the US only ranks 21st in the world for YoY GDP growth.

Over the last 14 years, US GDP growth has remained rather flat.

A fundamental case for gold remains with market internals flashing red. Bearishness is only expected as US equities hit new “all-time” highs every week, but nobody seen 2008 coming. Not the Fed, not the mainstream media. The boom-bust cycle continues.

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