Last week gold and silver reacted somewhat unexpectedly to the FOMC report and slight improvement in a few headline economic indicators. From another perspective, gold and silver prices are simply giving way to the fundamentals.
The widely disparate opinions about what is going on in the economy, where it is headed, and what we must do about it are enough to make your head spin. That, in a nutshell, is the source of the historic uncertainty in today’s markets.
Economics is anything but hard science. There are no fundamental equations on which inviolable theories can be constructed. Principles that once were moderately successful in predicting the markets fail to explain much of what we see today. Because of the human element, the markets are subject to perceptions and emotions, monkey wrenches that are forever being tossed in and breaking down the machinery.
People observe the world through their own microcosm. When we are presented with a version of reality that is at odds with what we see, we seek another explanation. The enormity of the chasm between current opposing schools of thought, however, can be overwhelming – even on the most basic principles.
The issue of economic growth as measured by the GDP provides us with a perfect example.
According to the headline seasonally-adjusted GDP, indexed to Q1 2000, the economy grew strongly until it stumbled in Q3 2008. Since dropping some 5% over the following four quarters, the GDP has climbed steadily back to realize a net growth of nearly 23% for the 12-year period.
John Williams, whose Shadowstats.com is a highly regarded source of alternative economic statistics, offers an opposing view using the same methodology employed by the government prior to 1980.
According to Williams, the true seasonally-adjusted GDP, also indexed to Q1 2000, experienced only anemic growth through the first half of 2000 then steadily declined until Q2 of 2003. The GDP then rose to a peak of less than 4% net growth where it languished until the crash of 2008.
By the end of 2009 the GDP had fallen to a net contraction of nearly 5%. In stark contrast to official figures, William’s calculates a net loss in GDP of 3.5% over the 12-year period.
The true value of Williams’ work, and that of many others like him, is that it opens our minds to new possibilities. To assess those possibilities and to weigh their respective merits for ourselves, we need a benchmark.
Because the purchasing power of gold and silver has been exceptionally consistent over millennia, there can be no better benchmark than gold and silver prices.