“If the U.S. citizen has been the global engine buying up all the Chinese goods then doesn't it make sense that if a recession occurs in America then it would affect all commodities including precious metals.”

A very good question from one of our Subscribers!   [We welcome questions from Subscribers]

On the surface it appears to make good sense.   To answer it one has to look at the sense of proportion on the global economy as well as on that of the U.S.

1. A recession technically is two declining quarters of lower or zero and minus growth.   A Depression is anything beyond this.   The potential recession that lies ahead is as a result of not only the interest rate rise, but the rising oil prices, together with manufacturing moving to Asia.   I am of the belief that interest rates will fall far quicker than they rose if a recession were to impact.   I have no doubt whatsoever that the Fed places growth continuation well above inflation fighting.  Once an economy starts to deflate and confidence slides away, it may well be beyond the Fed to turn it around even if they drop interest rates dramatically.   If oil prices continue to rise, then growth will have to be saved through tumbling interest rates and more.   This will encourage inflation and place tremendous pressure on the $ in global foreign exchanges.    The Fed will struggle to keep it high.
2. The cheap imports from China actually contribute to lower inflation within the States, undercutting local prices as they do.   This is one of the reasons why inflation has been low.
3. China and India are growing at an 8 to 10% growth rate per annum.   In the case of China, I would see within 5 to 10 years it gaining sufficient momentum to be a main global economic driver in itself.   Already it is providing additional growth to the countries around it in Asia, such as Japan and Korea.   It is this growth, on top of the usual demand from developed countries that is placing such pressure on the limited commodities available on the world market.   After all these resources were projected on a future, without growth in either China or India.   The newcomers are two more at a table already full.
4. It is easy to think that because the U.S. is the main driver of the global economy it is the only one.   This is not so.   Europe is developed with over 400 million citizens to which, one has to add every other economies of the world, all buying from China and oil from OPEC.   They are interlinked and interdependent.   The U.S. with 300 million people is the main pivotal driver at the moment but only in terms of leading the way, not being the army itself.   Therefore the impact of a recession in the States, whilst Europe is still expanding [which is today's reality] will not have the global impact expected, unless the sliding of confidence in global growth and global currencies follows.
5. Consequently, even with a mild recession [and I see no more than that now provided the oil price does not hold over $85], the demand for these commodities on the world markets will remain high.   Now stack that against a commodities market that has neglected exploration for so many years and you see that one of the main problems facing the global economy is that it does not have sufficient resources to supply this burgeoning global economy for years to come.   Certainly a recession in the States will not lead to a significant enough drop in demand to rectify this shortage to the extent prices come down.
6. Turning to precious metals one finds in Silver a market that has been supplied to a great extent government sales of stockpiled silver, once used in coins.  The there was and is the change to digital camera from silver based photography, which led to dropping demand as we are now seeing.   The silver market has largely absorbed this so far producing dropping supplies [as government sales in China and India have now ceased] and rising demand [as new industrial uses have to some extent supplanted photography demand drops].   Now add to this the amazing demand from Exchange Traded Fund, which to date have accounted for just under 100 million ounces, and you have a situation which despite any recession will continue to see higher prices.   The monetary aspect of silver, still not a feature in the silver market, of consequence, is yet to come, sometime in the future.
7. Gold too is experiencing a rise of demand over supply in total.   Not only is it rising as a metal, but the investment/monetary aspect of gold are a feature of that market and likely to remain so even in a depression.   Gold after all is a place to keep your asset in uncertain times, when other assets face dropping prices.  Those who invest in gold do so with surplus cash and are of the sort not so badly affected by a recession per se.   So its value has broadened far beyond simply being a commodity.
8. But gold's real value lies in uncertain times, when doubts about currency values persist, when doubts about other asset values appear, doubts about the future not just of the U.S. economy, but about the global economy disturb investors to the extent they seek a refuge in the one asset that holds or increases it value in extreme times, gold!

So we believe that gold is an asset that will hold steady or rise in value 'in extremis', as Greenspan wrote.   The value of gold is that it is an instrument of value where no other one is.  It is not a 'promise' to pay the bearer', which currencies are, but an asset that can be treated with value in the darkest days of war, even in enemy territory.   It is the knowledge that increasingly uncertain days lie ahead that is attracting responsible investor to the gold market.   These could well include national governments as well as large institutions.   The sight of Central Banks slowing down their own sales of gold stands testimony to this.  

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.   Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.  Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.    Gold-Authentic Money / Julian D. W. Phillips assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

 

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-- Posted Wednesday, 6 September 2006 | Digg This Article