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So, here we are today, gold and silver traders, with the U.S. economy contracting a bit because of a decline in defense spending; the Fed touching off their cannons to fire back by keeping QE3 going, and some nascent signs that Europe is on the mend. Well, central Europe anyway.
But behind these developments lie data more textured and perhaps ultimately more positive for precious metals.
The biggest hit to the U.S. economy came from a sharp drop in defense spending, 22% for the quarter. The drop is the result of a distortion that saw the Q3 expenditures increase 13%. This happens yearly because the federal government's fiscal year ends September 30, and typically agencies try to spend all the money they have in the pot, or lose it. There are also the troop draw-downs in Afghanistan and Iraq; and the Pentagon's fear of sequestration of funds due to the fiscal cliff issue. The Washington Post has an in-depth analysis today of how defense affects the GDP, highly-recommended reading.
As you may know from our earlier follow-up alert (approximately 2:30 NY time), the Fed voted 11 to 1 to continue the $85 billion per month asset buying and monetary easing falling under the umbrella QE3. One lone voice, crying out from Kansas City dissented, warning of inflation, among other things. (Yet inflation was only 1.2% last quarter, scarcely enough to get your suspenders in a bunch.)
At The Gold Forecast we habitually keep our ear to the ground concerning inflation, and for the first time, we see what could be the signs of future real inflation - good for precious metals.
Annual incomes rose 6.8% (annualized for the third quarter) and the cost of housing rose 5.5% for the year. We have yet to dig deeply into the annual income numbers, although we do know that a substantial portion of the growth was in the form of bonuses and early dividend distribution. Before we assign all of this growth to the wealthy, though, let's remember that dividends mostly are paid out via pensions, insurances and other retirement programs to more ordinary people.
Typically, if sustained, this kind of income growth precedes two other developments. The first is inflation, which seems distinctly under control. The other is an increase in payroll hiring, since it appears that the employed are having difficulty keeping the work flowing, so they are receiving incentives to work more and harder. Something's got to give.
One dim bulb in the chandelier, though, is the rise in the Social Security payroll tax. Actually a reversion to the old rate, it could hamper consumer-spending growth this year. On the other hand, it will make the viability of the SS fund less precarious, a political issue that eventually must be faced.
Europe. Always swampy ground. Europe's recovery is based on the economies of Germany, The Netherlands and Belgium. Northern Italy and eastern France seem to be perking up quite a bit. But the rest of the Union? Let's be very kind and give it a C-minus.
As always, wishing you good trading,
Gary Wagner
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