Gold Prices Flat as Inflation Runs at 6%: How Long Will That Last?

Gold PricesWe are told by the “gold bears” that we are headed for a period of deflation ahead, so we should sell gold bullion because it doesn’t have any purpose in your portfolio. But these “gold bears” might be surprised to know that inflation in the U.S. economy is already much higher than what the official numbers tell us.

Long ago, I explained in these pages how the Consumer Price Index (CPI) doesn’t really take into consideration things that actually matter to consumers.

We need to look at alternative measures of inflation, like the Everyday Price Index (EPI) reported by the American Institute for Economic Research. It considers goods and services that Americans buy frequently.

The EPI, a better indicator of inflation, increased 0.5% in June, following an increase of 0.3% in May. (Source: American Institute for Economic Research, July 17, 2013.) Based on June’s inflation number, inflation is running at an annualized rate of six percent, according to the American Institute for Economic Research. (It feels more like 10% to me.)


I also read articles that say there is no demand for gold bullion. I don’t understand this notion. Look at the facts: the majority of the selling we witnessed in May was in the “gold” paper market. Looking at the physical market, demand has never been stronger.

So far this month, the U.S. Mint has sold 36,500 ounces of gold bullion in coins. Last year, for the entire month of July, the U.S. mint sold 30,500 ounces of gold bullion in coins. The month of July is not even over yet and the U.S. Mint has already sold about 20% more gold bullion than it did in all of July 2012. (Source: U.S. Mint web site, last accessed July 23, 2013.)

China, the second-biggest gold bullion-consuming nation after India, hasn’t seen a change in demand as the precious metal prices have come down. According to Stifel Nicolaus, a brokerage and investment banking firm, China has already imported 20 million ounces of gold bullion this year. In 2012, for the whole year, the country imported 26.7 million ounces and for 2011, it imported 13.8 million ounces of the precious metal. (Source: Financial Post, July 13, 2013.)

If the import of gold bullion into China keeps at this pace, then this year, China will consume 50% of global mine production or 35% of total supply of the precious metal in the global economy.

All of this shouldn’t be a surprise to my readers. I write about these facts as I see them happening, and will continue to do so. I remain bullish on the yellow precious metal’s price.

Quietly, gold bullion prices are increasing. After making their lows below $1,200, they are now above $1,300 again. Have the precious metal prices bottomed? It is still too early to ask that question, but this bull remains unfretted.

Michael’s Personal Notes:

I completely disagree with the notion that the housing market in the U.S. economy is improving.

No doubt, we have seen home prices increase, but the price increases have been minor and restricted to certain geographical areas—but by no means do the price increases suggest there are actual improvements in the real estate market. In fact, the housing market may face even more trouble ahead.

For the housing market to see real recovery, we need to witness increased participation from home buyers. While an increase in home prices may suggest to some that there are actual home buyers coming into the market and pushing prices higher, the truth is the opposite.

When I say “home buyers,” I don’t mean institutional investors who have been buying homes in the U.S. housing market to rent. I mean those individuals who actually buy a house to live in it—they are not there to speculate.

In June, first-time home buyers accounted for 29% of all the existing-home sales in the U.S. housing market—down more than nine percent from the same period a year ago. According to the National Association of Realtors, in a healthy housing market, first-time home buyers should account for 40% of all existing-home sales. (Source: National Association of Realtors, July 22, 2013.)

I can see the number of real home buyers decline even further.

The national average commitment rate for 30-year mortgages, reported by Freddie Mac, was 4.07% in June. In the same period last year, it was 3.68%. As mortgage rates continue to rise—and they will as the Federal Reserve prepares to “taper” quantitative easing—it will become more difficult for home buyers to afford a home.

Consider this: the Housing Affordability Index, from January to May of 2013, has fallen 18%. It stood at 172.7 in May and was 210.7 in January. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 23, 2013.)

I wish I could say the U.S. housing market is witnessing a recovery, but the statistics suggest otherwise. I will consider the housing market to be improving when I see real home buyers returning to the market and buying homes. As it stands, with interest rates on the rise, I can’t see them returning for years.

The yield on the U.S. 10-year Treasury stands at 2.55% this morning—116 basis points higher than one year ago. As rates continue to rise, the dynamics for institutional investors change. At one point, they will become sellers of homes, not buyers. And this will put more pressure on the housing market.