The Heavy Weather Report - 2008
This is the third in a series of annual newsletters on economic trends and the geopolitical forces that drive them. In 2006 I wrote a newsletter to family and friends called Heavy Weather – 2006, in which I discussed my analysis of macroeconomic trends, projections for the future (I had called the year-end spot gold price on-the nose two years in a row), and strategies for dealing with what I believed to be an impending crisis. Most of what I said there still applies.
In the next newsletter, Heavy Weather – 2007, I further analyzed 2006 in hindsight, offered a primer in economic elements and trends, and refined my projections for 2007 based on those trends. This was all from a perspective inside the US economy looking out, with a particular focus on the behavior of precious metals (a critical issue to anyone preparing for the future).
In this year’s essay, I will review 2007, evaluate the performance of my crystal ball, then stick my neck out for 2008 and beyond.
This series continues in Heavy Weather – 2011.
2007 in Hindsight
The Outlook for 2008
Gold in the Coming Year
Deus Ex Machina
References and links
2007 in Hindsight
In my January 2007 Heavy Weather newsletter, I made some predictions about the gold market here are the results, graded A through F in accuracy:
· [A] Increasing activity from professional investment managers. This came true. Gold and silver ETFs really took off this year, with talk of a platinum flavor. But the real news-behind-the-news was the dramatic rise in volatility as institutional investors like hedge funds began to make their presence felt. Even so, they barely got their feet wet. When they really jump in, look out! The pundits on tout-TV (CNN financial news) finally had to acknowledge the presence of gold, tracking the spot price alongside other major indicators. Some are now recommending portfolios contain 10-20% precious metals, up from 5% or so last year when mentioned at all. The Financial Times admitted that gold is starting to behave like money.
· [D] Culminating in the start of a spike that begins when the amateurs finally take notice. This was a miss. There has been a surge in TV and print media ads for absurdly overpriced gold and silver coins, but no obvious popular spike. The man-on-the-street is still unaware of the real reasons for owning them.
· [A] The increase in volatility to continue. $100 swings over two month spans will not be unusual. Bang-on. There were three such run-ups this year, in January, August, and October.
· [A] Expect gold to close the year in the 800-850 range. This is the fourth year in a row I have nailed this. It closed in NY at 833, with an intra-day high of 843, up from 640 in January 2007. Nice! Were you holding?
· [F] The scoop on silver: a December spot of $20-22. Once again, I failed utterly to get silver even ballparked. It lagged behind gold, moving modestly for most of the year from 13 to 14.75. Disgusted, I traded most of my silver for gold.
In a more general vein:
· [A] The stock market boom will appear to continue, at least for the first half of the year. And so it did, rising sharply until June, then entering a highly volatile sideways region for the rest of the year. Bingo.
· [B] The dollar index will struggle to fall through the resistance at 80, succeeding by mid-year. In fact it fell through 80 in September, two months later than I predicted, and never looked back, bouncing off 75 at years end. This has occurred before and is very bad news indeed. Many on Wall Street said it would never happen.
· [C] Stagflation will become more and more obvious until official denial is pointless. Though the US Gov predictably continues to issue cheery denials, financial institutions and journals are starting to admit we are in a recession. Stagflation is not in the mainstream financial news, though some talking heads smirk when the ridiculous official inflation stats are quoted.
· [B] Housing sales will fall off dramatically but prices will only fall in areas where they were the most inflated. Got this half right, erring on the optimistic side. Sales and construction are way down, and time-on-market is up. But prices have faded nationwide by more than 10%, mostly in the second half of 2007.
· [B] Oil prices will remain relatively low for the first half year but will close the year between 70 and 80. In fact they rose sharply throughout the year, up 40% from $60/bbl to close briefly at $100.
· [B] By year's end it will be obvious to most that the five year old commodity bull is not over. TV pundits now agree it’s not over but disagree on how long China and India will keep it going. The average investor still does not seem to realize that there is a commodity bull in progress.
· [A] The TV financial news pundits will continue telling us to just keep trading, and “stay the course”. Yep. Just like last time. A number of well-respected investment Gurus are starting to warn of an impending market crash, but CNN financial news just keeps smilin’. They are starting to look a little worried, though.
· Some time this year will be recognized in hindsight to be a major tipping point into economic crisis, though not immediately. This long range prediction will not be decided for another year or two.
· [A] Son-of-Bush will become more radical, more isolated, and more at odds with congress and the public. Got that right. Approval ratings at an all time low, 70% oppose continuing the Iraq war. Bush ignores it all and continues to blow sunshine in the middle of a shit-storm (I just lost my G-rating).
· [A] It will become obvious that congress is unable or unwilling to reign him in despite much posturing. Bingo. Exactly.
· [A] The erosion of privacy and civil liberties will continue, perhaps accelerate. Only a minority will object. Talk of impeachment will continue and increase but I don't hold out much hope. I won’t list the many horrendous laws, executive orders, and just plain acts-by-fiat that pushed us closer to dictatorship in 2007. Habeas Corpus and Posse Commitatus are dead. Right to keep and bear arms can be denied on the basis of medical history and medication use, to name a few.
· [C] Opposition to the forever war (on drugs, terror, the Constitution, and your wallet) will gradually grow without reaching Viet Nam levels. It will be largely ignored by the administration. Only the Iraq war has gathered any real opposition, except among the Ron Paulistas.
· [A] More presidential hopefuls will appear. Other than Ron Paul, none will have an effective plan to take the tough measures required to head off disaster. Bingo. Denial and slander are the response by twisty-little-candidates, all alike. Noone seems to realize how desparate our plight has become, perhaps unwilling to take the public heat for proposing the necessary and painful corrections.
· [B] The US public will continue watching 'American Idol', 'Survivor', and 'CSI Miami' (Ron who?). Mostly true. But Change seems to have become a significant issue in much of the electorate, with war and the economy gaining precedence.
None of the long-shot surprises that were on the table early this year actually came to pass, and “For this relief, much thanks”. Even the fairly likely seeming attack-on-Iran failed to materialize. One can only speculate.
The Next Big Heading
You can't tell the players without a program.
The Outlook for 2008 (I dust off the crystal ball)
You can take most of this with a pound of salt, I don't really have a crystal ball. But any careful student of trends and patterns can make predictions with better than random results, that's what brains are evolved (or designed if you prefer) for. Besides, I read a lot of Science Fiction and that uniquely qualifies me to predict the future. Furthermore I've had a little luck doing this in the past and it's made me cocky.
Gold in the Coming Year
The stock market boom will appear to continue, at least for the first half of the year. The dollar index will struggle to fall through the resistance at 80, succeeding by mid-year. Stagflation will become more and more obvious until official denial is pointless. Housing sales will fall off dramatically but prices will only fall in areas where they were the most inflated. Oil prices will remain relatively low for the first half year but will close the year between 70 and 80, barring acts of lunacy. By year's end it will be obvious to most that the five year old commodity bull is not over and equities are going to suck most vigorously. The TV financial news pundits will continue telling us to just keep trading, and “stay the course” like they did in 1998-2000. Go lemmings go.
Some time this year will be recognized in hindsight to be a major tipping point into economic crisis, though not immediately.
Son-of-Bush will become more radical, more isolated, and more at odds with congress and the public. It will become obvious that congress is unable or unwilling to reign him in despite much posturing. The erosion of privacy and civil liberties will continue, perhaps accelerate. Only a minority will object. Talk of impeachment will continue and increase but I don't hold out much hope.
Opposition to the forever war (on drugs, terror, the Constitution, and your wallet) will gradually grow without reaching Viet Nam levels. It will be largely ignored by the administration. More presidential hopefuls will appear. Other than Ron Paul, none will have an effective plan to take the tough measures required to head off disaster. Like a deer in the headlights, the US public will continue watching 'American Idol', 'Survivor', and 'CSI Miami' (Ron who?). Boy do I want to be wrong about this.
In 2007, we can expect increasing activity from professional investment managers, culminating in the start of a spike that begins when the amateurs finally take notice. Where and when that will end is anyone's guess, either a drastic but partial correction or (slightly less likely) hyperinflation leading to a crash-and-depression. The peak of this is probably somewhere between 6 months and two years off.
Last year, I said 2006 would be harder to call than 2005, but I still called it very close both years. In 2007 I expect the increase in volatility to continue. $100 swings over two month spans will not be unusual. If there is no spike, I expect gold to close the year in the 800-850 range.
If there is a spike, it will likely be preceded by at least one 'false spike' to 1500 or more. The true spike will peak in the 2500-3500 range. Tops are notoriously hard to call, so if you want to bail out, wholly or partially, you might want to break this up and scatter it along the curve.
For the scoop on silver, just multiply the gold percentage changes by 2X and apply them to silver. That gives you something like a December spot of $20-22. A spike could run to 88-130. One cash-averse strategy is to hold silver on the way up and gold on the way down.
Deus Ex Machina
It's likely that we will get one or more 'surprises' this year. Here are the possibilities I can think of:
Manic Spike: This would be a replay of the 1980 gold spike, with the same stages and symptoms but a more compressed time frame. I consider this inevitable, more a question of when than if. For 2007, it's something like a 40% probability. See the discussion above.
9-11-II: Another 9-11-like attack would just be too, too, convenient this year for some. We've already whipped the Islamic lunatic fringe into a foaming frenzy. Whatever that fool in the White House does next could drive them over the edge. And I wouldn't put it past him to fake it for purposes of gathering more war powers and renewing popular support. It wouldn't be the first time (read your history) This would be worth a $200 jump in gold all by itself. A 25% probability.
Iran War: A 60-70% probability by many accounts. Look for the current US naval buildup in the gulf to culminate in a massive air attack, after which the Israelis fly in and hit underground facilities with tactical nukes. Unless we have some gee-whiz new non-nuclear option up our sleeves, nothing else will do the job. We won't have to dirty our hands by using our own nukes (again). The Israelis will view it as a matter of national survival and won't care what anyone else thinks. Gulf shipping will halt. Oil will shoot over $100 a barrel. Gold will jump 100's of dollars, The USD will drop. It will accelerate and deepen any economic crisis. This is the worst possible scenario, and except for the nuke part the most likely. Bummer.
Dollar Crash: A 20% probability. The present orderly disassembly of the USD world reserve currency system reaches a tipping point and turns into a rout, with everyone racing to not be the last caught holding near-worthless dollars. Many things could trigger it. There would be little warning. It could all take place over a few days or weeks. In a worst-case scenario, the price of gold in dollar terms might become almost meaningless, 5000, 10000. It's more likely though that the dollar would lose 50-60% of it's value but not crash completely. There are too many assets in the US for it's currency to become completely worthless.
I'm supposed to summarize everything I've already said at this point, but I'm not going to do so. If you didn't get it the first time, read it again. Free your mind.
Wavyhill – January 2008
References and links
Gold Market Lending, An inside look
World gold supply and demand
Five year gold chart