Doom and Gloom - Inflation, Unemployment and the Dollar

Inflation & Gold (Photo credit: Paolo Camera)

If you don't trust the stock market, think the bond market is primed for a crash and aren't sure if the real estate market has hit bottom yet, you are probably sitting on cash, suffering with paltry returns and waiting to see what to do next.  Gold and silver may present a near-term buying opportunity due to their recent sell-off.  Silver is especially intriguing since the performance spread between gold and silver has widened considerably since late in 2011 (see charts below).

Gold

Silver

I believe the long-term fundamentals continue to hold for precious metals (higher inflation, weakening dollar and uncertainty in the global financial markets).  Soon, the entire world will be printing money in an effort to avoid recession and austerity, which should be extremely bullish for the metals!

The very slow economic recovery in the United States faces many headwinds and could show signs of stalling out in the next couple of quarters.  Indeed, there are already troubling signs such as weak employment numbers that are below expectations.  The troubles in Europe, uncertainty about Asia/China economies, and structurally high unemployment and inflation in the United States will be difficult to overcome.

The actual rate of US inflation is likely much higher than what is being reported by official government statistics, which exclude food and energy components (significant costs for most people).  The alternative measure keeps the methodology consistent from how it was done in 1980, which provides more of an "apples to apples" comparison of how inflation has trended over time.  What is troubling about the chart below is that the disparity between the official statistics and the alternative measure has grown considerably since the early 90's.

The actual rate of unemployment is likely much higher than what is being reported as well, due to the large number of people who have given up trying to find a job (since these people are not considered "unemployed" in the official statistics).  An estimate for these individuals is added back to the alternative measure to derive a more true measure of unemployment.  As you can see, more than 1 in 5 people are estimated to be unemployed in the US and the number is not going down.

The dollar continues to be crushed by the Federal Reserve's continued effort to support the economy by printing money (low interest rates and quantitative easing).  As you can see in the chart below, since the late 80's the dollar's purchasing power has declined by approximately 50% and there's no reason to see why this trend will not continue based on current Fed policy.

It is important to have enough cash on hand for liquidity and emergencies - more is probably better given the economic uncertainties we now face.  If  you have excess cash available for investing, or if you have access to cheap borrowed funds at a low fixed rate, taking a position in gold or silver now might be a smart move.

Related articles

• When will Gold and Silver Turn Bullish?

  ---

• The Real Unemployment Rate?

  ---