Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
Now that we’ve reached halftime in the 2001 investment game, has the Dow reached the optimistic levels many analysts predicted for it back in the first quarter? Has the Nasdaq returned from the dead? Has the bull market of the ’90s been resurrected? Is the “team” ready to head out
and knock ‘em dead in the second half?
Hardly. At halftime, the Dow is down 2 percent. And the Nasdaq is off 13 percent. Not exactly what investors were hoping to see at this point.
Much of that first quarter speculation had earnings picking up sometime in the second quarter and continuing through the latter half of 2001, with the economy successfully dodging recession. Unfortunately, the second quarter did nothing to inspire confidence. And little evidence exists to support a resurgent economy.
To the contrary, earnings reports of the week of July 4 were worse than what many analysts had predicted. Far worse in may cases, due largely to the prevailing fact that the S&P 500 still sells at an astronomical 26 times earnings.
Couple that with bad unemployment news (that rate has risen to 4.5 percent, which includes the distinction of having the highest number of jobless claims since 1992) and the economy at halftime looks more unsettling than either investors or most talking heads were prepared to see.
Troubling issues remain. The consumer is increasingly getting squeezed in the vise of record debt and rising unemployment. Interestingly, even while consumer net worth sank 8 percent over the past year due to the declining value of the stock market, consumer credit expanded at a 10
percent annualized rate! That’s on top of a credit-card-debt-per-household rate that rose from $3,000 to $7,000 through the ’90s. Could this continual expansion in the face of a shaky
economic picture be because consumers are now using all available credit just to stay afloat, as opposed to making new, discretionary purchases? Consumer spending statistics would appear to support that theory. That rate has been steadily declining, from 4 percent in the first quarter to
1.5 percent in the second.
But won’t the Fed’s actions kick in and save the second half of 2001? Or, to phrase the question differently, why haven’t the Fed’s actions kicked in yet?
There have been a remarkable round of rate cuts amounting to 275 basis points over the past six months. And a meaningful tax cut is being mailed out this summer. So far, though, that fuel has yet to hit the economy’s carburetor. Some analysts believe it takes upwards of a year and a half to reap the full benefits of a rate cut. Others make that timeline as short as three months. Still others point to times in our economic past when rate cuts failed to stimulate the economy when it most needed it, most notably during the days following the Great Crash. But, at least in the first half of 2001, it’s fair to say that neither the tax or rate cut has had little of the desired effect.
It’s important to know that, unlike some other parts of the economy, the fundamentals for gold remain very strong. For one thing, the precious metal is almost criminally undervalued. Gold is trading 15 percent below its average global production cost of $315 an ounce. Yet gold demand continues at a record-breaking pace. According to the World Gold Council gold demand set a record this past quarter with a 12 percent increase. On a worldwide basis, there’s 30 percent more demand than supply. That was reflected recently in a gold auction by the Bank of England which was oversubscribed by over four times. Meaning there were four times as many people wanting the gold than the central bank had to offer at today’s price. This was far greater demand than even the analysts were anticipating. All of this has to bode well for future prices.
Even Steve Forbes, writing in an article in Forbes magazine, said that gold should be trading at $350.00 per ounce – 30 percent higher than it trades now.
Should rate and tax cuts fail to stimulate the economy, and should a recession rear its ugly head in the second half of the year, you may want to explore the diversification of your portfolio with gold. Not only could such a move be eminently profitable (indeed, with gold trading 15 percent below its production cost, what do you have to lose?), but it can help offset any losses the other parts of your portfolio may incur.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.