Knowledge is money in resource investing. That is why The Gold Report reaches out to the top experts in the sector all year long to bring you their best investing ideas. For this special year-end feature, we asked some of your favorite thought leaders about the tools they use to spot trends and make those important buy-sell decisions. What are the early indicators that gold will rise, plummet or coast sideways? Is it Federal Reserve bond buying? China's growth rate? Lipstick sales? You may be surprised by the answers.
Watch the Dollar: John Williams
The best way to predict gold is to follow its inverse indicator, the dollar. That is why ShadowStats Editor John Williams is closely watching central banks. "There has been an effort to discourage people from owning gold because a rally in the price of gold is generally taken as an indication of poor performance by the central banks," he explains. The challenge with using central banks as an indicator, he warns, is that buying and selling by central banks is usually covert; it's done through third parties. That can lead to a confused and dysfunctional market that ignores fundamentals and reacts with extremes to headlines.
One example is all the controversy over tapering or not tapering. When asked about the Federal Reserve's announcement to begin tapering, Williams says, "I did not expect the Fed to back off in any meaningful way, and it did not. The minimal tapering likely was more politics in advance of the change in Fed chairmanship than anything else. The banking system remains in deep trouble, favoring ongoing quantative easing (QE3), and the economy remains weak enough to continue the needed political cover. Going forward, the Federal Open Market Committee (FOMC) allowed for expansion as well as further pull back in QE3, dependent on underlying conditions. Those conditions still favor expanded easing."
Williams cautions that quantitative easing is bad news for the dollar relative to the rest of the currencies. "That will become very inflationary because weakness in the dollar tends to spike oil and gas prices. And that's the number one area of cost-push inflation we've seen in the last couple of years. The long-term result can only be higher inflation, a much weaker U.S. dollar and, eventually, higher gold prices."
He continues, "The dollar is the basic indicator here and I am looking for heavy selling. In fact we've been seeing some recent weakness in the dollar particularly against the Swiss franc."
Williams does not see official unemployment numbers as a reliable indicator. "The employment rate today is down 0.8% from last year. Normally the drop in the unemployment rate would be good news because it means that the number of people unemployed would be declining, people are going back to work and employment is rising. But in reality, the only reason the headline number has gone down is that some of the unemployed people are no longer being counted because they've become discouraged. They want a job, they want to work, but nothing is available."
When it comes to the all-important consumer confidence indicator, Williams was also careful about what statistics he uses. "The consumer tends to drive the economy so you need to look at things that drive consumer liquidity. One of the best indicators is median household income adjusted for inflation. It never recovered from the recession. In fact, as the recession supposedly ended and the economy bounced back, household income continued to plunge and is holding at its cycle low. And that cycle low is lower than median household income—adjusted for the consumer price index—was back in 1967–1970. The consumer is in terrible trouble here."
Consumer credit, despite some public statistics, is also not recovering in a meaningful way, according to Williams. "All the growth has been in student loans, not in loans that buy dishwashers and automobiles. If that should start to pick up that would be a positive sign. As long as it stays as it is, it's a negative sign."
Consumer confidence, which Williams considers a coincident indicator, has been volatile and not any more positive. "The level of confidence still is at levels that are traditionally seen deep in recessions, not in economic recoveries. We are not having an economic recovery."
He explains further, "The only reason that you see growth in the gross domestic product (GDP) is that the rate of inflation is understated. The implication there is a big negative for the dollar. Relative economic activity is always an important factor in the dollar's strength."
Williams is concerned that people will be shocked with downside surprises as the country enters what will be formally recognized as a new recession. "It's bad news for the budget deficit because all the happy forecasts are based on solid 3–4% economic growth in the GDP instead of continued stagnation and contraction, which will result in lower tax revenues. Government spending in the support programs will be higher and the deficit will widen. That is what the markets are deadly misreading and that will be a big negative for the dollar."
Williams also counsels watching presidential approval ratings, which are at a low right now. "Usually a president's approval rating is a pretty good indicator of where the dollar is going because it indicates how the rest of the world views the U.S. government. All these factors are leading to significant downside pressure on the dollar. I think we are going to see a tremendous dollar selloff in the not-too-distant future and the biggest gainers should be gold and silver and the precious metals.