Where is the Recovery?

Where is the Recovery?  

Gold bears have been pounding gold on the short side because they think the US economy is in, or about to be in, a strong economic recovery which means the Fed will raise rates, the dollar will soar and gold will decline further.

There are three problems with this argument. First, the vaunted recovery is increasingly in doubt. Second, how many times can the same argument generate a lower gold price? Fed rate hikes are the best telegraphed event in financial history...isn't it already priced in? Third, higher rates do NOT equal lower gold prices as recent history clearly demonstrates.

A recovery, as the word implies, should mean a return to the previous growth path. By that definition, the US economy is slipping further behind where it would have been if it really was recovering from the 2008-9 recession. The US economy is now $2.4 trillion smaller than it would have been if it had regained the performance of the late 1990s and $923 billion smaller than it would have been if it had regained the growth path established in 2005-7. With each passing month, the economy slips further behind.

The annualized, seasonally-adjusted second quarter GDP estimate that was released last week was 2.3% while the first quarter estimate was revised upward to 0.6%. That averages to an annualized growth rate of just 1.45% for the first half of this year when the Fed was confidently expecting more than 3%. Evidently, the economy did not recover the growth that was lost in the first quarter, which would have been the case if it had been a function of bad weather as the main stream cheer leaders claimed. Furthermore, the poor growth that was achieved includes an ongoing, frightening build-up in wholesale and retail inventories which, in our view, constitute the next recession in the making.

Last Friday, we got a shocking reminder that employment income continues to lag despite what the Fed says is a robust labor market.

And where is the recovery in capital spending? Without investment, how does the economy grow faster?

But Fed rate hikes may not mean a lower gold price after all. This chart from HSBC shows what happened the last time the Fed began a rate hike cycle in 2004. As the Fed raised rates (represented by the red line), the gold price went up (black line):

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