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2014 Retrospective and 2015 Outlook for Gold and Silver

Darren V. Long Senior Analyst, As published in Guildhall Precious Metals Advisor

For all the predictions in 2014, it was yet another year we managed to get most things about the world economy wrong. 2014 did not prove to be the year the world roared back to the path of recovery. Global economic output grew by just 3.3 percent, an expansion that was dubbed by the IMF’s (International Monetary Fund) chief economist as “mediocre and worse than forecast.”

The outlook for 2015 doesn’t look much better. The probability of the world falling back into recession – defined as GDP growth of two percent or less – is only around one in 100, but much higher for the advanced world according to the Fund. The IMF thinks there is now a four in ten chance the Eurozone area will slip back into its third recession since the financial crisis next year.

This bundle of bad news has led many scholars and spectators alike to put weight behind the theory that the ageing west is now facing a period of ‘secular stagnation’ characterized by persistently weak demand and almost non-existent growth.

2014 Retrospective
Here are seven other related issues that plagued the global economy in 2014:

  1. The United States and European Union (along with several other smaller countries such as Canada) announced a first round of economic sanctions against Russia on March 6, which were followed by further rounds in July and December. These restricted Russian access to capital markets, and hit Vladimir Putin’s inner circle. Sanctions and falling oil prices instigated a currency crisis, with the Russian rouble hitting a record low of 80 roubles to the $1 USD on December 16.  If this continues expect 2015 to be a year in which new types of financial war become far more prevalent and in the mainstream.  I expect we will continue to see Russia strengthen their Gold reserves to combat the effects of a lower rouble value.
  2.  May 21 marked the release of a book entitled “House of Debt”, written by economists Atif Mian and Amir Sufi. They contend that an explosion of household indebtedness in the years up to 2008 left families fraught with uncontrollable burdens when the crisis hit. This, and not the financial meltdown, has kept consumer spending low in the years since 2008, depressing the economies of the US and Europe since that time. Mian and Sufi’s suggested remedy is for governments to tighten rules on lending to households, and offer widespread mortgage relief to foster recovery. These were not the aims of the 2010 Dodd-Frank Act, or the Basel III accords. Former treasury secretary Lawrence Summers called this “the most important economics book of the year”.  In addition to this book we spent many occasions discussing the world economy with noted experts such as Gerald Celente, David Morgan, Marc Faber, Dr. Paul Craig Roberts and others, all of whom recommended that at least some of a person’s portfolio should be dedicated to physical precious metals, especially given the expectations of the coming years.
  3. The euro-zone disaster continued to unravel, bringing the continent closer to deflation as growth decayed. On February 10, the German supreme court argued that the European Central Bank’s programme of buying the bonds of beleaguered European countries including Greece, Portugal, Italy, and Spain, violated the treaties of the European Union, but referred the case to the European Court of Justice to adjudicate. As the bond-buying programme has been widely credited with protecting these countries from default, the EU-level court case, which began on December 14, could severely limit the ECB’s policymaking armoury. The European Commission expects the Eurozone to have grown by just 0.8 per cent in 2014.
  4. On August 22, Mario Draghi gave what, for a central banker, was a barnstorming speech.  The president of the ECB said that “all available instruments” would be used to contest deflation, remarks widely interpreted to suggest that Mr. Draghi would deploy quantitative easing if needed.
  5. On October 2, as IMF Chief Christine Lagarde told an audience at Georgetown University that the global economy faced an extended period of low growth, Mr. Draghi announced a scheme to buy up asset-backed securities in the Eurozone in a bid to increase lending, but initial evidence suggested that its effect would be narrow. Economists believe Mr. Draghi will be forced to opt for quantitative easing in 2015 – if he can surmount the legal and political obstacles.  In our interview in December, David Morgan questioned the validity of the approach the EU is taking and fully expected countries form within the EU to continue adding to their central reserves with more Gold as well as to continue to repatriate product left overseas, such as in the case with Germany, who have repatriated in over a year a paltry 5 tonnes of Gold since their original request.
  6. Growth outside of the oil industry is set to total six per cent in the Gulf in 2014, the IMF said in October, while oil sector growth remains mostly stationary, as commodity prices slid to new lows.  However despite silver falling some 16 percent through the year gold managed to maintain almost the same price it started with.  Ministers from across the Gulf have been bullish about the impact of lower oil prices on public spending, with economists pointing to significant external reserves and mostly low break-even points. However, cheap domestic utilities are unsustainable. Oil’s fall to below $55 per barrel as of December, a five-year low, will likely focus regional policymakers’ minds on the need for energy subsidy reform. 
  7. On October 29, the Federal Reserve ended asset purchases, bringing quantitative easing to a close, its balance sheet more than doubling to $4.48 trillion since November 2008. For the first time, the Fed’s governing board did not describe the slack in the economy as “significant” – interpreted by Kremlinologists as a sign that the Fed believes that the economy has turned a corner. US unemployment, a proxy for slack in the labour market, stood at 5.8 percent in November, compared to its 2010 peak of 10 percent. The IMF expects US growth of 2.8 percent this year.  However if you apply the same measurement equations found in previous years, as recently as the Clinton era, you would have a significant difference in the resulting numbers.  John Williams from Shadow Stats has used those same measurement statistics and the result is astonishing:

“The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

 The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”-Shadowstats.com

Unemployement Rate

In addition to this the actual rate of participation, which is at least one way in which the government can manipulate official employment numbers, is actually dropping.  This means less people are being measured and the outcome results in a lower published rate of unemployment:

Labour Force Participation

 

The global economy is at a crossroads that could see it either finally escape the aftermath of the 2008-2009 financial crisis, or it could sink back into a slowdown. Personal and public debt loads are high, and getting higher, especially here in Canada as we resort back to our old habits, while the recovery in job markets and income levels has been disappointing and income disparities within countries are widening.

Many of the biggest threats to Canada’s economy will sound familiar, they’ve been building since the Great Recession, but 2015 also poses a unique set of challenges that could affect Canadians this year.  There are just two that I would like to touch on before we finish for 2014.

A Rise in Interest Rates
Canada, along with the U.S., is on track for an interest rate hike in 2015. It would be the first since 2010 and consumers, particularly on this side of the border, have continued to amass more debt while also taking out large mortgages in the years of low interest rates.

While any hike is anticipated to be gradual, it could be a jolt to some households who are struggling to pay back debt. A higher interest rate could sink more Canadians into bankruptcy and could cause a slowdown in the housing sector, which has propped up Canada’s economy in the years since the recession.  Gold and silver are one way many Canadians are now choosing to hold savings.  A small but adequate portion placed in your portfolio of no more than perhaps 20 percent of net worth is something that many more Canadians plan to continue and start to do in this new year.

Debt Loads, Yet Again
Economists have been warning consumers for years that debt loads are growing to astronomical levels, and that could be a huge risk if interest rates rise. In Canada, the household debt-to-income ratio rose to a new record high of 162.6 percent in the most recent quarter.

And things are not much better south of the border, where consumer debt is worth a total of $3.2 trillion and where there has been a resurgence in subprime lending as well as the now somewhat infamous growth of the subprime-oil mess as it relates to the lending of billions to shale oil producers.  These are part of the risky banking practices that helped spark the global economic crisis in 2008 and in hindsight gold and silver bullion did help to protect.

2015 For Gold and Silver
I believe we are in a world where no currency or economy is safe. Historically there has been a trend during periods such as these towards the ownership of long term hard assets, such as gold and silver bullion. Many central banks have undoubtedly proved they have a continued appetite for gold and will revert back to it as a default currency during tumultuous period of global instability.

Increasing geo-political interest in applying gold as a reserve currency to replace American debt is an early indicator of the path we will follow. Many countries will continue to increase their intake of gold as a form of payment for goods and if 2014 is any indicator economic sanctions will push these countries to be more creative resulting in the usage of more gold if anything.

The recent failure of the Swiss referendum to back currency with gold will eventually be followed by passed legislation across sovereigns in my view. Russia is one nation that is today looking to gold out of its own inevitability. But if the status of the US dollar as the reserve currency changes, it will be in every nation’s interest to revert to the gold standard. I see the beginnings of this transition today and we spent a good deal of time discussing this with our friend Gerald Celente throughout the year. 

So despite the still present factors weighing against gold and the possibility for potential downside pricing, I see the catalysts for gold gaining in influence starting now. Recent technical support for gold seems to be evident. It shows that gold decline has leveled off as of late around a level where it did the same roughly five years ago. This is just one more reason to believe we have or are marking a bottom for gold somewhat near current value. Given the already greatly priced-in expectation for the U.S. Federal Reserve, the risk to the US dollar posed by adversaries to America, tax driven capital flow factors, and the increasing demand for physical gold by sovereign states, I see gold okay to hold now and too risky to short. Long-term investors who have refrained from buying gold until now should begin taking stakes in my view. And all portfolios exposed to America and the dollar should own gold now as a hedge against risk to their stability.

I would like to thank our readers, subscribers and show listeners as well as countless thousands of clients who have purchased physical bullion from Guildhall throughout 2014.  I wish you nothing but the best for the New Year and I hope it is a healthy and prosperous one filled with higher gold and silver prices.

Yours to the penny,

 

Darren V. Long
Guildhall Wealth Management Inc.

 

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