U.S. Economy: Handicapping a Handicapped Fed

By Adam Lass & Sara Nunnally

Precious Metals: Chinese Demand for Gold Outpaces Supply

Blue-Chip Investing
Tomorrow you will get nothing: No drop, no hike, no nothing. At least, not anything real anyway. What you will get is some placative language in the accompanying notes, most probably vague on actual dates or actions, but promising all sorts of diligent watchfulness.

Material Profits
We know that China’s been a black hole for all types of commodities: steel, copper, concrete, corn… But what’s it want with gold?

It’s that time of year again: those “Masters of the Banking Universe,” the famed and/or infamous FOMC are at it again, and the whole world is holding its collective breath awaiting its weighty pronouncements.

(FOMC? Sounds like those Russian thugs James Bond used to fight. No, no, not the glitzy playboy in the movies. I’m talking about the work-a-day bureaucrat with a gun of Ian Fleming’s original pulp novels.)

(Okay: everyone who remembers that James Bond first appeared in 1953 in books written by a former British Naval Intelligence officer, raise your hand. Anyone? Sigh.) Okay, back on topic: The Fed is desperately trying to balance out an ailing economy and stubborn inflation.

For those of you who want to be argumentative about it, yes, the economy is ailing: GDP growth for the first quarter of 2007 was an annualized 0.6%. De-annualize this, and you are looking at 0.05% growth per month, for all practical purposes zilch, since figures that small fall within most such studies’ margin of error.

Now I note that whenever this figure is quoted, the smoke and mirrors crowd starts whining that GDP is a trailing indicator, and gin up something more “forward looking.” Last month, for instance, it was April’s modestly strong showing in Durable Goods.

The fact that this was entirely supported by a one-off rise in promised airplane sales at Boeing (booked years in advance of actual delivery, bye the by, and perilously subject to cancellation) was entirely ignored by these purveyors of spin.

Now they are hoist by their own petard. It means blown up by a bomb of your own making, which is about as apropos as you can get as the subtraction of those singular aviation sales forced May’s figure down so low it came in less than half of what these clowns predicted.

But heck, that’s the least of our worries: take away aviation’s 22% drop, and you still get significant losses in primary metals, machinery, electronic appliances and non-defense capital goods totting up to a nasty 2.8% drop. Try to put lipstick on that pig, boys!

Too late: I just received notice that the futures market has jumped on this drop and is now predicting that the Fed (remember them? The guys this column is supposed to be about?) will use this weakness as an excuse to drop rates tomorrow! In fact, analysis of federal funds futures pricing indicates that speculators have upped the odds of said rate cut from around 37% a few days ago to 56% today. And the odds on a rate hike are now down to 12%.

Well guess what? They’re wrong! As much as this particular Fed Chairman would love to drop rates (keeping rates low was, after all, why he was hired in the first place). But that darned inflation thing just won’t go away.

Yeah, yeah, I know: “core CPI” was flat in May. First off, that doesn’t mean it was down. Prices for everything from blue jeans to cars still rose some 3%, but the rate that they are going didn’t increase for the first time in a while. Woo hoo!

Add back in the costs for all those “non-core” things like gas, electricity, and food, and not only are consumer prices climbing, but the rate that they are climbing has increased 2.7% over the past 12 months. And that is outside the Fed’s famed “comfort zone” by quite a bit.

So tomorrow, you will get nothing. No drop, no hike, no nothing. At least not anything real, anyway. What you will get is some placative language in the accompanying notes, most probably vague on actual dates or actions, but promising all sorts of diligent watchfulness.

The spin guys will jump on this vague promise with much relief: “No rate increase” will be the market’s rallying cry both tomorrow and in a few weeks when the margin notes are released. The rally might even run to Dow 13,688, but no further. And then it’s back to reality, as the herd -- strapped for actual facts -- searches in vain for yet another excuse, while the market cycles back down to current lows.

At a time when gold seems to have lost its luster (at least temporarily), it’s normally good to sit on the sidelines and wait things out. In fact, gold has just dropped below the confirmation point of $647.10 I’ve been telling you about these past few weeks.

Could we see that double-top formation drop gold all the way down to $530 an ounce? That’s a big drop, and one that could force many investors to the sidelines, willingly or otherwise.

But you don’t let the price of gold dictate your investments in precious metals… In fact, while precious metals prices have been experiencing a strong retracement, certain junior explorers have done fairly well for investors.

My next Material Profits issue talks about exactly that, and I wanted to offer you a sneak peek at what I’ll be talking about. The July issue is due out in the next couple weeks, so if you like what you read, there’s still time to join before the issue is mailed out…

We know that China’s been a black hole for all types of commodities: steel, copper, concrete, corn…

We’ve been particularly focused on the country’s growing energy consumption, eyeing the Red Dragon suspiciously when it tries to acquire oil resources from not-so-friendly nations like Venezuela, Iran, and Sudan.

The World Gold Council reports that retail sales spiked 15.5% in April, compared to April 2006, and clocked in at $87 million.

Last year, there was a bit of rumor circulating on the possibility that China could cash in its dollar surplus for gold. What a scary scenario, and a bit preposterous at the time. Now, with the dollar dropping weight like Star Jones after her gastric bypass surgery (and the U.S. economy barely inching along), perhaps it’s time to reevaluate our reaction to that rumor.

In India, folks carry their wealth in gold jewelry… But Asian countries also like tangible evidence of their wealth. In fact, the Chinese classify gold as one of the Five Elements, along with water, earth, fire, and wood.

The World Gold Council noted in a recent article, “‘Gold is a traditional means of hoarding wealth and represents a way to buy economic security in much of Asia and the Mideast,” said Kevin DeMeritt, a gold investment adviser at Lear Financial. “And in these parts of the world individual wealth is growing rapidly.’”

That’s something that a lot of analysts are looking at in particular with China. After screaming along at such a high economic growth rate for so many years, many investors are screaming bubble. And you can bet the Chinese government is doing everything in its power to prevent that bubble from popping.

One thing it can do is manipulate its stock exchanges. The government is the biggest player in the Chinese stock market, and it will look to limit the wild speculation that has made a lot of people a lot of money.

If the stock markets start to fall a bit, one of the few places left for Chinese money to run is straight into gold’s arms.

For more details on where China will get the gold to meet its growing demand, sign up for Material Profits. Just visit the Web site at www.materialprofits.com.