The Long Term Prospects For Gold: Is The Writing on the Wall for the U.S. Economy?

With the Federal Reserve giving indications that it may raise interest rates in June, many people think that the bull run for gold that opened up this year, might be at an end.

This is short-sighted thinking.

The truth is, if you really want to know where gold is headed, then there’s a good chance that you don’t want to buy and sell gold for a quick profit. You want to buy gold because it offers you a degree of safety. You want to buy gold because it hedges against long-term problems with the U.S. economy, including a weak U.S. dollar. You want to buy gold because it hedges against the unforeseen problems that can pop up with the stock market, with unemployment figures - heck, you might just like gold because it’s a real commodity; and, when the dollar is strong, it makes sense to use that dollar to buy real commodities.

This leads to a basic question that goes far beyond June: is the writing on the wall for the U.S. economy?

David Stockman Tells Fox Business The U.S. Has Been Living Beyond Its Means

Stockman, the budget director for Ronald Reagan in the early 80’s, recently turned to Neil Cavuto of Fox Business and said the following things:

• “Whoever is elected will inherit a recession…We’ve got a deflationary recession emerging everywhere in the world…China is a massive speculative mania that’s going to collapse any day.”
• “We have been living beyond our means for thirty years…it’s only a matter of time. People said that in 2007, ‘don’t worry, they’ll muddle through,’ … then all of the sudden, wham, the bottom fell out, the meltdown happened, the panic was on.”
• “It’s hard to say what the black swan is, but right now, if we look at this economy, inventories are building up. If we look at transportation for instance, rail traffic is down 10%, trucking traffic is down, manufacturing has been negative for months.”
• “The big banks do have more capital cushion, but the risk has just been offloaded elsewhere. Right now you have trillions of new high-yield bond funds…that are taking on far more risk than is embedded in the yields people are receiving. So I think you just moved the risk to outside the banking system…we have more junk bonds than ever before.”
• On bailing out Puerto Rico, Wall Street, etc., “The whole thing is wrong because it creates moral hazard.”
• “Another five or ten years, we’re going to have a massive increase in the retired population. How do you fund all that? … None of this is being focused on and we’re just drifting, as we have in the past, and sooner or later, you hit the wall.”

Not exactly the most cheery interview you’ve ever heard on the economy. But his points are well-taken.

Is Now The Time To Buy?

Now seems like an odd time to buy gold. With a potential hike in interest rates looming this month, people are afraid to purchase.

But as a wise man once said, “Buy when there’s blood in the streets.”

Now is when the U.S. dollar is relatively strong. In a recent blog post, Sovereign Man pointed out how strong the dollar is - mostly in the context of buying overseas assets - and recommended buying real assets with these dollars, adding, “Gold and silver are also real assets, and both are historically inexpensive relative to the U.S. dollar.”

Your investment strategies are left to you. But if you take a long-term approach to the economy, the writing may, indeed, be on the wall.