Some time back, a reader wrote me challenging my understanding of the gold market. He said clearly and directly he found my lack of understanding of the precious trade laughable. The reader was responding to my statement that gold would not get to $2,000, much less $5,000 as more than a few really “smart” analysts were predicting.
My reasoning for my conclusion was (and is) gold has no value other than perceived value and because of that its price derives primarily from the perception of market and economic conditions.
Back when this exchange took place, the wild-eyed wanderers and the doomsayers held much more sway with the breathless media than they do today. Back then, hyperinflation was coming because of QE, the Eurozone would collapse from its burden of debt, the Chinese economy would fall to an unfathomable growth rate of 7%, which would destroy the global economy, and the US economy would falter taking the US back into recession. All of that created an anxious environment which drove the price of gold to just under $2,000.
It was then I made my argument that gold would falter. I suggested that the QE would not lead to hyperinflation, that the Eurozone would pull itself together, that a 7% growth rate for China was a good thing, not a bad thing, and that the US economy was heading forward, not backward. I based all of that on my understanding of the then current global economic fundamentals, the pragmatism of European politics, the incomparable size and underlying strength of the US economy, and Ben Bernanke’s deep understanding of the Great Depression and what QE would do and what the effects would be relative to that.
As it turns out, I was correct on all fronts, at least so far. Inflation is tame, the Eurozone is starting to grow again, China and the global economy are getting better, even with 7%, and the US economy is getting stronger, not weaker. Thus, we have …
- Gold, heading for the biggest slump in three decades, reached the lowest price since June as an improving economy cut demand for wealth protection.
My point above is not to claim, “I told you so,” (well maybe a little); it is to use the reality above to hammer home the point that perception is a large part of any market, but, ultimately, perception gives way to reality. If one educates one’s self on economic principles, the players involved in world politics, and market history, one will see through the myopia of the talking heads, the doom of the wild-eyed wanderers, and the fear the breathless media generates to sell the news.
In my mind, when things are going economically well, understanding individual markets and the overall market is even simpler. It comes down to one thing – corporate profit, which is driven by consumer spending.
- The Conference Board’s Consumer Confidence Index rebounded in December. The index was reported at 78.1 in December, which was above the consensus expectation for a reading of 75.8 and also well above last month’s unrevised reading of 70.4.
Consumer confidence is the catalyst for big-ticket consumer spending, which then drive business growth and corporate profit.
- Contracts to purchase previously owned U.S. homes edged up in November, marking the first increase in six months and providing a hopeful sign the sector has begun to stabilize after its momentum was sapped by rising mortgage rates.
Big-ticket spending in the housing market, for example, drives growth in many ancillary small businesses, which make up a large percentage of employers in the US. So, when small business is feeling good, it is a sign the market will do well because employment will improve, which drives more consumer spending.
- With the economy appearing to hum along nicely, small-business owners are an optimistic bunch heading into 2014, with many even feeling that next year could be a breakout one. In a survey, three-quarters of owners said they expect sales to improve in 2014, while the small-business “confidence index” hit an 18-month high of 108.4 in December.
So, 2013 is out the door today. What a year it was on so many fronts. The US political clowns could not derail the market or the US economy, no matter how hard they tried. In fact, they did something good – they achieved a two-year budget deal. Globally, Europe stabilized and China achieved its goal of reducing its rate of growth. The market gained some 30%.
Expect more of the same in 2014 with a bit less intensity on the market side and bit more intensity on the economic side.
Happy New Year one and all.
Trade in the day; Invest in your life …
