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The rise in the dollar today accounted for about 1/3rd of the fall in the price of gold. 

 

The rest of the decline can be attributed to profit-taking and an ill-founded belief that the U.S. economy is significantly strengthening. This notion was based on the rather robust expansion of the Chicago Purchasing Managers Index (PMI). However, coupled with last month's anemic performance by the same index and the middling to poor performance of the Milwaukee area PMI, which still shows contraction, you really have to wonder what analysts of the gold market are seeing.

 

We think they are pinning their hopes on an early tapering or even a quick ending of the Fed's QE3 program. 

 

But, let's tote up the factors mitigating against such an early move. 

 

First and most important are the rise in taxes and cuts in spending executed under the so-called sequestration bill. The former slows consumption; the latter means there is less tax money going into buying items as diverse as pencils and F-35 fighters. An unrelated aside: the wars in Iraq and Afghanistan are ending and less money is being spent on defense in general.

 

The U.S. economy grew at a 2.4 percent pace in the 1st quarter, but in Q2 is expected to slow to a rate of between 1.5 percent and 2.2 percent because of government budget cuts, which are already putting a strain on manufacturing. (Despite the optimism of the Chicago report, above.)

Lack of income growth as job gains remain painfully moderate weighs on domestic demand. Last month, income was completely flat and the savings rate was unchanged at 2.5 percent.

The weak demand tone was underscored by very benign inflation pressures in April, which some say might indeed conversely be malignant and lead to a 20 year deflation cycle like the one Japan experienced.

MSN pointed out that, "A price index for consumer spending fell 0.3 percent last month after dipping 0.1 percent in March. A core reading that strips out food and energy costs was flat after rising 0.1 percent the prior month."

Over the past year, inflation has risen just 0.7 percent, the smallest gain since October 2009, pushing further below the Federal Reserve's 2 percent target. The index had increased 1.0 percent in the period through March.

Core prices were up 1.1 percent, the smallest rise since March 2011, slowing from 1.2 percent in March.

The weak spending and the lack of inflation pressures should dampen market speculation the the U.S. central bank might start scaling back monetary easing later this year.

Dampen? Maybe douse is a better word. 

 

Look for a major correction in equities fairly early in the summer, something that will help gold and silver. 

 

Note also that at the 1390 through 1420 price point, we are not seeing much physical buying. Physical buyers are rooting for the bear until they turn around and purchase, then they become bull fans very quickly. 

 

Kitco's gold sentiment survey seems to predict higher prices next week. Seventeen out of 27 participants say gold is going to rise. 

 

A big number to watch this coming week is the employment report for May. It will be the last monthly report before the Federal Open Market Committee meets on June 18 and 19. Unemployment would have to drop very dramatically in order for the Fed to even consider changing the QE3 course.

 

But, if you think we are struggling in the U.S., consider the E.U. Overall unemployment is still ragingly high at 12.2%. Inflation is running at less than 1.5%. 

 

Repeat: You can't grow an economy with inflation under 2.5 to 3% inflation. 

 

In Greece 65% of young people are unemployed. In Italy 40% are unemployed. Europe is creating a Lost Generation. The fruits of mindless austerity.