Europe’s woes put pressure on gold

Because of Germany’s weakening export driven economy and because German bonds are preferred by the European Central Bank, yields on the country’s 10-year bonds are negative.  Consequently, European bond investors, primarily made up of  banks and insurers that depend on income, have turned to US Treasuries.  Upward pressure on the dollar means downward pressure on gold.

Although the US is facing problems of its own, it remains the best looking horse in the glue factory.

China’s slowdown is widely known, with industrial output slowing sharply from 8.5% to 5.4% year-over-year in April, while retail sales grew at the weakest rate in 16 years.  And, China has $40 trillion in debt.  Disconcerting is that China has been the stimulus of world growth, importing many commodities — and now finished products — from around the world.

Europe faces an economic slowdown, some of which undoubtedly has to do with Brexit.  If Great Britain leaves the EU, a precedent will have been set, and who is next?

Japan’s economy has been kept afloat by years of the Bank of Japan (their central bank) buying not only the majority of the government’s bonds but also being a heavy buyer of equity stocks.

There you have it, the world’s second, third and fourth largest economies being kept alive by central bank printing.  So, what about the largest?

Stock investors in the US seem convinced that the Fed will return to a loose monetary policy.  Every stock downturn is bought.  That’s called the “Fed put,” which is a clever way of saying that you can sell your stocks at higher prices when the Fed loosens.

Although the Congressional Budget Office (CBO) projects the federal deficit is less than $900 billion this fiscal year, the national debt will increase by something like $1.2 trillion.  Many federal expenditures, such as for natural disasters and the Postal Service Fund, are not added to the official budget deficit, yet remain obligations that taxpayers have to pay. Neither the Iraq War nor the war in Afghanistan were reflected in budget computations prior to 2009.

According to the CBO, without a significant increase in taxes above historical rates or a reduction in benefits, growth in Medicare, Social Security, and Medicaid will quickly produce an explosion of federal debt.

Although gold is ridiculed by Wall Street, it remains the “go to safe haven” when times get tough.  Our 119-month economic recovery is only one month from tying the longest on record.  Yet it is the weakest recovery in the past 100 years.

When our woes are recognized, even gold haters will be buyers.