Tags: Gold | risk | China | US

I Will Become a Gold Bear When . . .

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Friday, 11 Apr 2014 08:20 AM Current | Bio | Archive

Last week, I gave the reasons why I remain bullish on gold while investor sentiment changed from liking gold to being fickle during the past few weeks. In an attempt to prove that I am not a blind bull, let me outline what it will take to convert me to a bear.

Domestic Criteria

When financial institutions choose to take all the cheap money the Federal Reserve gave them, which has been invested in high-earning stocks and emerging market bets, and now buy low-yielding government bonds and riskier mortgage-backed securities.

When job creation exceeds the minimum number needed to employ all the new people entering the workforce, subtracted by all the people retiring, with some new jobs left over to reduce the number of unemployed. That needs a consistent 250,000+ new jobs created each month.

When the president and Congress agree on a fiscal policy that produces a budget surplus. That means that the budget not only does not spend more than it takes in and we do not have to borrow money or raise the debt ceiling, but we actually have money left over that goes to pay down the national debt and fully fund our obligations like Social Security.

When the U.S. economy grows at a steady 3 to 4.5 percent a year. Enough to be robust without igniting inflation yet deliver big tax revenue to shrink the deficit.

Foreign Criteria

When key economies like the European Union and important emerging economies like China and India get on a solid growth path. The European Union has been struggling with very slow and marginal improvement, with many member countries teetering on deflation. China's solid growth appears to be slowing of late.

When systemic risk in the Middle East is reduced. In spite of all the normal tensions in this area, there are a few situations that could lead to conflict with significant global impact. And weak governments in Afghanistan and Iraq means more potential terrorist threats. An Iran successful in developing nuclear capability would dramatically increase instability in the Middle East and the world.

When terrorism is on the wane. In particular, cyber attacks against our financial and key government systems have increased with greater sophistication and frequency.

When Russia and China curb their military and territorial ambitions. Russia's recent annexation of Crimea, pressure on Eastern Ukraine and other former Soviet states and China's naval challenges to Japan on territorial waters indicate ambitions to grow through military action.

Conclusion

I am a firm believer in America and its people, so I believe that eventually our economy will recover. And as things get better in the United States, there will be less need for gold as an inflation hedge and less volatility in gold prices, which does not favor gold as a speculative investment.

However, there will be plenty of bumps along the way. In addition to potential stock market corrections and inflation risk, there are many risks beyond America's control. And increased globalization means more interconnectivity between world economies. Coupled with advances in technology that bring change and impact faster, a serious event can have immediate and deep impact.

But even in a "normal" world, I still believe that gold should be a part of a balanced portfolio. Under good circumstances, having a small amount of gold is a time-tested insurance policy against the impact of inflation on your paper investments. And unlike a stock or bond, gold will never be worth nothing, so it provides an alternative store of wealth for those who cannot afford to lose everything.

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Ed-Moy
Last week, I gave the reasons why I remain bullish on gold while investor sentiment changed from liking gold to being fickle during the past few weeks. In an attempt to prove that I am not a blind bull, let me outline what it will take to convert me to a bear.
Gold, risk, China, US
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2014-20-11
Friday, 11 Apr 2014 08:20 AM
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