Follow The Bouncing Budget

The U.S. budget deficit took another bounce down in May, and, of all the leading indicators, that one is crucial.

Why?

Because the whittling away at the federal government's deficit expresses increased tax revenues more than cuts to spending. That means more people are working, more people are buying. More people are active in the economy.

There is also increasing demand for just about everything: labor, commodities, manufactured goods, education and health services and transportation.

Construction is lagging behind, as we all know, but that is a result of the process of pushing the pig through the python, the pig being unsold inventory from the recession. But, if you look at places where the recovery is more or less complete, construction is not just humming along, it is booming.

This all can mean one of two things for gold.

It can mean that before any action the Fed takes on interest rates becomes a chief influence over inflation, prices will rise somewhat dramatically. It will be at that pinpoint crease in market activity that we want to be ready to leap. We think we hear rumbles already.

On the other hand, it could mean that risk appetite will continue to increase and money will continue to flow into equities and other risky investments (like the derivatives that almost undid the world economy seven years ago).

One headwind gold bulls will continue to face is the decline of the euro versus the dollar. We see every day that there is no help from dollar softness. Rather, it's quite to the contrary. Dollar strength is hurting any rise that gold may generate on its own.

We think there is a larger issue in play, though. All economic activity is cyclical. Where are we now in the cycle? At the top? About to reach a top?

We continue to believe that the western economies made a tragic mistake in not devoting more stimulus money to infrastructure projects. Their disorganized approach to roads, rails, airports and shipping ports is tragic and liable to have a disastrous outcome. (And let's not even begin to talk about how the United States is absolutely squandering the high-speed future of the Internet because of poor regulatory oversight.)

Bottom line is that we may see more growth in the next two years with a spike in inflation. By then we will see the poor planning chickens come home to roost.

Could we possibly be looking at a new stimulus in 2017?

GOLD ATM

For a lighter note, read this.

As always, wishing you good trading,