Trade Deficit and Gold
The US trade deficit hit an all time high today, and many people are blaming the Gulf Coast Hurricanes. On the opposite side of the world, China reached a record surplus of $80.37 billion in 10 months and people are blaming China's "unfair" trading practices, such as their currency and cheap labor.
Although the numbers are staggering in themselves, what I find even more staggering is that government officials are still reaching for excuses on why we have a US trade deficit and why the deficit with China keeps on growing. In a way, this reminds me of a gambling addict who keeps on making excuses on why he is in the hole. Instead of realizing that his luck has run out, he keeps on finding ways to borrow money and convince himself that his losses don't look as bad. In addition, instead of realizing that his opponent has a stronger hand, he accuses him of cheating.
In reality, the US deficit is not the result of China's growing strength or the damage that was caused by the Gulf Coast hurricanes. The US trade deficit has been increasing consistantly and significantly over the last several years. Note these rising trade deficit numbers: 2001(362.7 billion); 2002(421.1 billion); 2003: (494.8 billion); 2004: (617.5 billion). In 2005, we are on pace to reach a record trade deficit of $706.4 billion!
The only way that we can begin to chop into this deficit, is if we realize that irrational consumer spending does not help out the economy. It might be a short term flow of cash, but it does not begin to solve the greater problem. Borrowing money from your mortgage to buy goods does not contribute to the overall strength of the US economy. As a country, we need to start saving and funnel our capital towards investments and manufacturing. Once we have actual goods to export, and once we stop relying on a service sector economy, then we will be able to see a decline in the deficit.
However, I don't necessarily have confidence that the above scenario will play out. Most likely, we will revert back to saving and manufacturing only when our hand is forced. This is liable to be caused by the inevitable rise of interest rates, overvalued real-estate market, and the decline of the US dollar. Meanwhile, I believe that positioning your assets towards gold or hard assets is one of the best ways of protecting your wealth.
Gold Buying Opportunity
Recently, I was speaking to an Indian client who was adamant about keeping Gold in his back yard (literally!). He stated that he had no confidence in the local banks, currency, and current economic affairs of his country. As a result, he decided that he would put most of his hard earned money in Gold. The funny thing is, this client lives in the United States, but I am not telling you where! As anecdotal as this story may seem, I believe that this will become more and more commonplace over the next several years. As Americans start realizing that they can buy less and less with their dollar bills, they will most likely shift their wealth into a "currency" that is rising.
Whenever we have a pull-back in Gold, like we have had in the last couple of weeks, I view this as a buying opportunity. After Gold reached an 18 year high, we experienced another round of profit taking. In addition, as the price starting declining, it served as an opportunity to shake loose investors who were not truly believers in gold. I believe that these pullbacks and consolidations are actually good for the long term movement of gold. If you notice the chart below, you can see that with every sharp major pullback, Gold had a strong rally. Currently, gold is rallying off the 455 lows and I see it as potentially breaking $500 before the end of the year.
As we continue to receive negative news about the US economy, terrorist attacks, and other geo-political concerns, I believe we will see more and more people flee towards what has historically been perceived as a safe haven. Unlike currencies, which come and go and are typically regionally based, Gold is recognized worldwide as stability and a basis for wealth. The time to act is now! Keep in mind that we will experience pullbacks and consolidations throughout the move up. However, the fundamental reasons for the rise in Gold will outweigh any short term profit-taking. If you do not have Gold as a part of your portfolio, this is a good time to get in.
Palladium...Still heading higher.
A couple of weeks ago, I wrote an article stating that we were in the midst of a Palladium breakout. Since my first recommendation in August, Palladium has risen 25% in value.
I see palladium heading higher, especially with the recent news coming out of Russia that reported palladium stockpiles are substantially less than expected. I believe that the combination of dwindling supply and the increase demand for the metal will serve as a springboard for the price to test the $260 level within the next several months. I also expect some resistance near that level, but I believe that we will eventually see a sharp run up towards the $320 mark.