Stocks are on the rise from Shanghai to London.
The Dow cracked the 10,000 point ceiling.
If it walks like a recovery and quacks like a recovery, is it?
Earnings across the boards appear to be up. Companies like Gannett, the largest U.S. newspaper publisher, and Eaton Corp., the maker of circuit breakers and fuel pumps, added at least 2 percent on profit that topped estimates.
Even more troubled sectors of the economy, like air travel, are starting to show signs of life. For example, the stock of AirTran Holdings, the low-fare air carrier that primarily operates out of the East Coast, is up 6.7 percent.
An Undercurrent of Uncertainty
More than 130 other companies in the S&P 500 are scheduled to report this week. The benchmark index for American equities has rallied 61 percent from a 12-year low in March on speculation the economy is emerging from the worst recession in seven decades.
Most market watchers believe the news coming out of Wall Street will continue the positive trend. Retail analysts also are projecting an upswing in consumer spending as the calendar inches closer to the holiday buying season.
But with unemployment on the rise, and the dollar on a persistent downward slide, it’s still tough for most Americans to feel as if the recovery actually has reached them.
In contrast to the numbers being generated on Wall Street, the continuing luster of gold seems to be reflective of the undercurrent of uncertainty that still is governing popular sentiment.
Gold has risen 19 percent this year. On Oct.14, gold hit an all time record high of $1,072 an ounce. Several analysts are now projecting gold to top $2000 an ounce by the end of next year.
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year. Options show investors expect the rally to continue. When prices reached all-time highs, the contract with the most open interest was the December call to buy the metal at $1,200. The contract to purchase at $1,500 an ounce was the third biggest.
Comparatives Do Not Match
With inflation still on the rise and domestic buying power waning, comparisons are being made to 1980 when gold hit a record $873 an ounce. The comparison between then and now may not be apt.
In the past three decades, consumer prices almost tripled, eroding gold’s real value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. On an inflation-adjusted basis, in today’s dollars, gold would have to hit $2,287 to be on par with 1980.
Since January 1980, the average price of a pound of white bread has risen almost threefold, from about 50 cents to $1.38 in August. Labor Dept. figures show medical care has surged more than fivefold. Gasoline and electricity prices have more than doubled.
Still, to most gold bulls, the metal has not reached its peak. From their vantage point, today’s record borrowing and low interest rates mean the government will have to accept faster inflation as the economy recovers. They see investors continuing to buy bullion as a means to preserve value during projected times of turmoil and economic stress.
There also seems to be wide agreement that the U.S. dollar will extend declines as the global economy’s recovery prompts investors to shift away from U.S. assets.
Even as the recovery looks as if it is gathering momentum, several fundamental forces are putting downward pressure on the dollar. Those forces include a massive budget deficit, bets that the Federal Reserve will keep borrowing costs near zero for an extended period, and the lingering probability for a double-dip recession in the U.S. Several major banks, including the International Monetary Fund (IMF), have joined the ranks of financial institutions that are prognosticating the dollar lower in concert with an ongoing escalation in gold prices. Last week, JPMorgan Chase & Co. said the metal will average $1,006 an ounce next year, compared with an earlier projection of $950. Deutsche Bank AG forecast an average of $1,150, up 32 percent from its estimate in July. Barclays Capital said that “prospects for a run at $1,500 should not be underestimated” next year. Earlier this month, Deutsche Bank, one of the world’s largest currency traders, said the dollar will fall to $1.60 per euro next year, a drop of 7.3 percent from last week, because of “rising fiscal deficits and loose monetary policy.”
Gold has moved in the opposite direction of the dollar over most of the past decade. The metal’s correlation coefficient to the U.S. Dollar Index is minus 0.8539. A correlation of minus 1 indicates two assets move inversely to each other, while a 1 would show they move in tandem. A reading of zero shows no correlation at all.
While the actual market value of gold may not have kept pace with overall inflation, it continues to mirror the atmosphere of uncertainty that still surrounds the recovery. As to whether the price of gold will rise to the heights forecast by its biggest promoters still is anybody’s guess.
For the foreseeable future, however, unless the weakening arch of the U.S. dollar is abated, gold prices likely will push higher even as the stock market continues its current uptrend.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
