METALS TO SOAR BY YEAR END: Inflation to Accelerate

By Jared Irish, Archer Financial Services

The events taking place in the markets and within our economy will likely send metals to new highs by spring of 2009. The forces that are lining up for an explosive move in the metals have never been greater in the history of the United States. We have an energy crisis which is sending an inflationary ripple through the markets. We are facing a global credit crunch, rising unemployment, and a weakening economy. The geopolitical tensions that are building among nations could intensify. If the Fed were to raise rates in the face of these economic forces it could be a disaster. If they do not raise rates these economic forces could eventually cause the dollar’s downward trend to accelerate, pressuring metals to new highs. Investors that are not protected may soon come to realize that their incomes and purchasing power have been wiped away by the ravages of inflation.

Economic Problems Getting Worse

In the currently overleveraged economy, we are facing a credit crisis that has only begun. Despite the chatter that we hear about the credit crisis being over, it is more likely that we are nowhere near the end of the subprime write-downs. Legendary investor Jim Rogers said a problem of this nature will take years to clear not months.

"This is the worst credit bubble we've ever had in American history… It's going to take a long time to work its way out. You don't cure a bubble in five or six months… It takes five or six years."
- Jim Rogers

The problems in the financial sector are getting much worse. Many regional banks have recently been downgraded. In June of 2008 Moody’s downgraded and stripped away the AAA rating for the bond insurers including MBIA and AMBAC. The housing market has not been this depressed since the 1930’s and the numbers continue to get worse than expected, month after month. According to the U.S. Census Bureau and the Department of Housing and Urban Development, sales of new one-family houses in May 2008 were at a seasonally adjusted annual rate of 512,000. This is 2.5 percent below the revised April rate of 525,000 and is 40.3 percent below the May 2007 estimate of 857,000.

Stock markets around the world are beginning to fall apart. The Dow Jones Euro Stock Index is down 22% and the Shanghai Index is down nearly 50%, year to date. Consumers are getting hit by the soaring costs of food and energy at they same time they are attempting to pay their credit card bills and mortgages. They are beginning to realize that inflation is higher than the Fed’s stated 4.2 percent. The Feds talk about raising rates is nothing more than talk. Although they were able to temporarily strengthen the dollar, they are losing the trust of the people. You can not listen to this type of noise. Historically the Fed has rarely raised interest rates in an election year. This chatter on the part of the Fed is not credible and will most likely be counterproductive. However, one day the Fed might be forced into raising rates despite our economic problems due to spiraling inflation. To succeed in this type of environment, investors must watch for the actual actions of the Fed and government officials rather than their rhetoric. The dollar will most likely continue its downward trend going into 2009. As this happens, investors should expect metals to move to new highs.

Energy Crisis Puts Upward Pressure On Metals

Politicians and the mainstream media continue to incorrectly place the blame of high energy prices in areas of limited importance, while ignoring the primary causes. For example, in the past, they have blamed high prices on geopolitical tensions. They have blamed prices on the “greedy oil companies.” This is despite the fact that the government earns more by taxing these companies than the companies actually make themselves. In 2005 they claimed prices were high due to the hurricane of 2005. More recently they are placing the blame on speculators. They can place the blame on whomever they want, but in the end they will have to face the facts. The principal reason for high energy prices is simply due to the fact that supply is not keeping up with demand. World production is currently at about 85 million barrels per day compared to world demand at 87 million. According to the BP statistical review, world primary energy consumption increased by 2.4% in 2007 – down from 2.7% in 2006, but still the fifth consecutive year of above average growth. The Asia-Pacific region accounted for two-thirds of global energy consumption growth, rising by an above average 5% even though consumption in Japan declined by 0.9%. Demand continues to grow as the supply continues to shrink and inventories keeps dropping. China’s growth of energy consumption for the year 2007 was at 7.7%. In the midst of this shrinking supply we are moving into the summer driving season and we are moving into the hurricane season. We face major geopolitical risks, including the situation between Israel and Iran along with bombings in Nigeria. Expect much higher energy prices to exert upward pressure on inflation and metals prices.

We are also witnessing declining world gold production despite the efforts and billions of dollars spent by mining firms to increase production. This is taking place even though gold prices have advanced from $250 an ounce in 2001 to the current $900 an ounce. This is partially due to the soaring costs of energy, lease costs and the other capital costs incurred to bring gold mines into production. South Africa, once the largest producer of gold, was adversely impacted due to the electricity shortages experienced by major mines that drastically slowed production.

SOURCE: GOLDSHEET Mining Directory - World Gold Production

In the midst of this dilemma, some government organizations continue their attempts to limit soaring metals prices. The IMF’s talk about selling gold is one primary example. Another recent example is when Vietnamese communist authorities halted gold imports in June of 2008. They evidently did not approve of their population seeking protection from the collapsing Vietnamese currency known as the Dong. This is similar to the U.S. where, in the past, they outlawed the ownership of gold.

Does any consumer truly believe that inflation is only 4.2%? Reality shows us that inflation is actually between 12% and 14%. Sadly to say, as we move forward it will cause those people invested in fiat currency and dollar based jobs to suffer the most. If you cannot control the horrendous events taking place in our economy, investors might as well benefit from them. Currently, the forces are lined up for an explosive rally in the metals by late summer or early fall. Why not benefit from this trend?

Investors seeking to protect themselves from inflation should continue to establish positions in the precious metals and commodity markets. Strategies to protect and benefit from inflation can be tailored to meet the personal objectives and financial standing of the investor. For a free consultation on how to protect from plunging stock markets, deteriorating fixed income portfolios, and soaring inflation, contact me at 1-877-377-7936 or email me at jared.irish@archerfinancials.com .

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