January was an impressive month for the markets. The Dow Jones Industrial Average increased 3.4%, while the Standard & Poor’s 500 gained 4.4%. It was the biggest monthly gain for the major indexes since 1997. However, the real star performances in January came from gold and silver. Gold finished January at $1,737.80 per ounce, representing a remarkable 11% gain for the month.
It was the largest monthly gain since last August, and the best start to a new year since 1980. Silver, which benefits from a safe-haven and industrial component, surged 19% in January, representing its largest monthly rally in nine months.
The Federal Reserve’s recent decision to keep record low interest rates until at least late 2014 is renewing inflation concerns. The central bank is attempting to force investors into riskier assets such as stocks, but investor psychology can be difficult to influence in this day and age. In a post-flash-crash and MF-Global-bankruptcy world, investor confidence is shifting toward preserving wealth with hard assets.
The Fed’s zero-interest-rate policy also gives little reason for investors to hold risky paper assets that produce low yields. Pimco’s Bill Gross, manager of the world’s largest bond fund, explained in his monthly letter that low yields may “induce inflationary distortions that give a rise to commodities and gold as store-of-value alternatives when there is little value left in paper.”
In addition to influencing investor behavior, Fed policy decisions affect consumers on a daily basis. Despite the Bureau of Labor Statistics’ inflation measuring stick showing little price increases, consumers in the real world are experiencing dramatic price hikes. In November, we discussed how the cost of Thanksgiving dinner increased 13% from the prior year, the biggest increase in 20 years. According to PNC Wealth Management, the cost to buy all of the 364 items mentioned in the “12 Days of Christmas” carol increased above $100,000 for the first time in history. Now inflation is showing up once again as America prepares to celebrate its most-watched television event.
Super Bowl XLVI airs this Sunday and it will cost consumers more than ever to host a party for the big day. The American Restaurant Association reports that hamburger prices have surged 60% in the last four years, while chicken wings are up 39%to new all-time highs. In January, the association reported that protein prices were averaging 19% above last year and almost 25% above the prior 5-year average. Meanwhile, retail potato chip prices have increased 12% and tomato prices for salsa have increased anywhere from 5% to 10%. In addition to adding smaller bottle sizes, Coca-Cola targeted 4% price increases in the second half of 2011. Boston Beer Co. Founder and CEO Jim Koch anticipates 30% price increases in barley costs for 2012. “A 30% increase in barley cost is significant for a brewer,” he said. “Some of that will get absorbed, but some will unfortunately be passed on.”
According to a new survey by the Retail Advertising and Marketing Association, consumer spending for the Super Bowl will reach an all-time high this year. The average game-watcher is expected to spend $63.87 on related merchandise and food, an increase of 8% from last year. As prices continue to increase due to a devalued US dollar, more investors and consumers will realize the need to protect their wealth. History shows that gold and silver are the preferred method to preserve wealth. George Gero, senior vice president at RBC Captial Markets says, “The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold, low interest rates to continue will make gold a good alternative hold and not expensive to maintain.”
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Eric McWhinnie is the chief commodities analyst at Wall St. Cheat Sheet. He has been an analyst at Wall St. Cheat Sheet since early 2010. He has worked at State Street and Waddell & Reed in financial advisory services and is also the editor of Wall St. Cheat Sheet's Gold & Silver Investment Newsletter and Commodities Investment Newsletters.
