 |
|
| |
|
|
| |
Blanchard feels that the Fed likely will leave rates unchanged
June 25, 2008
Here is what we see going on at Blanchard and Company, Inc:
Clearly many investors are waiting to see what will happen with the Fed meeting today. Since the dollar will react to the statements that accompany the rate decision, gold will likely move in the opposite direction.
Blanchard feels that the Fed likely will leave rates unchanged and shift their focus towards inflation, just as Chairman Bernanke has hinted. However, inflation is a lot like toothpaste - once it is out, it is very hard to get back into the tube. And inflation is a very real condition within the U.S. economy right now. That being said, gold is a hedge against inflation, and therefore it's such a tremendous hedge to both protect wealth during these inflationary periods and also generate positive investment returns when other asset classes decline in value.
The U.S. economy is also still sluggish. Unemployment is up, durable goods are flat, and the only positive indicator we've seen is that consumers continue to spend their money. However, this cannot last. The tax rebate checks were a short-term stop gap measure and can boost the economy only minimally. With home values plummeting and credit cards maxed out, there is no more consumer cash. Once the consumer is tapped out, there will be nothing tangible to keep the economy afloat. A recession, while not imminent, is certainly on the horizon. As we have seen recently, the only way to attempt to stimulate the economy is to dump liquidity into the market, which hurts the dollar and strengthens the price of gold.
Inflation is going to continue rising, and the economic sluggishness we're experiencing is likely a long-term issue for the U.S., which is a great recipe for strength in gold and other tangible assets. Blanchard is predicting $1,150 gold by the end of the year. While some analysts my think this figure to be a bit far off, considering that we broke through the $1,000 level only a few months ago, and we will likely get back to those levels in the short term, especially considering that gold has remained above its 1980 record price level during the traditionally slow summer months..
While the metal seems to be a bit range bound right now, there is not a lot that can happen that will push it below $850. The economy could recover at the same time inflation falls back to more manageable numbers, but that is very unlikely to happen. Oil could fall, however, if you look at the relationship between oil and gold, historically it has been around 15:1, it is currently at 6.5:1. Either oil needs to drop to around $60 a barrel or gold needs to increase to more than $2,000 an ounce for this relationship to get back in line. We think the latter is more likely than the former.
|
|
|
|
|
|
| |
|
Copyright © 2009 Blanchard and Company, Inc.
|
|
