The Blanchard Economic Report
As any small business owner knows first-hand, the U.S. economic picture sees many challenges. While officially the U.S. economy has been expansion phase since 2009, the growth levels have not returned to the normal levels seen before the Great Recession and Financial Crisis hit in 2008.
The current environment remains extremely bullish for gold and other precious metals. Gold remains one of the best performing asset classes in 2016, up over 21%. Despite the strong gains, many on Wall Street believe this bull cycle in gold is just beginning with forecasts for higher prices after the election and in 2017 and beyond.
Here is a quick snapshot of the economic environment now.
1. Economic Growth: Since the recession ended in mid-2009 the U.S. economy has grown at about a 2% annual rate, making the current expansion the weakest on records back to 1949.
While the latest third quarter gross domestic product data surprised with a 2.9% reading a number of "special factors" such as a surge in soybean exports and a jump in inventory building helped boost the number. Economists say those special factors are transitory and unlike to repeat going forward.
For the year, overall growth is expected at around a 1.5% pace in 2016, which is growth in positive territory but not enough to generate wage growth or noteworthy inflation. Many businesses still don't have the ability to raise prices on goods and services. Changing demographics, including Baby Boomers who spend less, along with massive debt overhang are two of the factors expected to weigh on growth in the years ahead. The nonpartisan Congressional Budget Office projects GDP to grow at around 2% annually through 2026.
Key takeaway: Slow growth is here to stay. That is bullish for gold as central bank officials will need to maintain historically easy monetary policy.
2. Federal Reserve Interest Rate Policy: Wall Street and the financial markets are expecting a well-telegraphed interest rate hike from the Federal Reserve at its December meeting. There have been no interest rate hikes yet in 2016 and if the Fed pulls the trigger in December, it will still leave the federal funds rate in an extremely easy money position with rates only moving up to a 0.50-0.75% level.
Key takeaway: Interest rates have never been this low for this long in the United States. A return to a more "normal" interest rate environment with the funds rate around 3.0% or higher is unlikely even in 2017. Lower rates for longer - that is gold bullish.
3. Inflation: Official numbers that the Federal Reserve monitors show inflation at low levels. The official personal consumption expenditure (PCE) remains at 1.7% through September. However, these official inflation readings are failing to capture significant price increases that U.S. consumers face each day including significantly higher rent and housing prices, higher medical insurance and overall medical care costs.
There is lots of money still sloshing around in the system. The Federal Reserve's balance sheet remains bloated in the wake of the money-printing quantitative easing programs started in 2008. Consider this: it took the Fed about 100 years to swell the size of its balance sheet to $800 billion just before the global financial crisis. Then, it took only six years, from 2008 to 2014, to more than quintuple its balance sheet to its present level of over $4 trillion. At some point, if money velocity picks up, this money has the power to unleash debilitating inflation. This is gold bullish
4. Negative Interest rates: Nearly 500 million people currently live in countries that now have a negative interest rate environment, including Europe, Japan, Sweden and Switzerland. Many countries now show a negative interest rate on their government debt. Governments are experimenting with untested negative rates in a desperate attempt to stimulate economic growth. At the end of the day, many of the best minds on Wall Street are warning of unintended collateral damage from negative interest rates, which includes weakening of the banking system itself and its key mechanism for profitability. Key takeaway: This is extremely gold bullish.
5. Geopolitical uncertainties: Today in many corners of the globe there are a number of "hot spots" that can turn into a crisis at any time. In the larger picture, there is a power struggle going on between the West and the rising East. China, Russia and other large emerging market economies are demanding an equal role on the world stage as their economic power grows. Gold has proven to be a time honored safe-haven in times of political, economic strife and even war. The current situation is gold bullish.
There are many more on-going factors that provide a positive outlook for the gold market and other precious metals ahead. Investors in today's world are looking for the safety and security of hard assets like gold. Throughout history, gold has acted as a currency, a safe-haven, a vehicle to store and growth wealth and a hedge against inflation. That remains true more than ever today.
Blanchard and Company recommends that its clients allocate 10-15 percent of their investment portfolios to physical gold and precious metals. Are your assets properly hedged and protected? Give us a call today at 1-866-764-9135 for an individualized portfolio assessment.