Gold News

Deflation Not Going Away

Really think the Fed will raise in June when the Dollar's up, inflation's down...?
PETER CARDILLO is chief market economist at brokers Rockwell Global Capital.
Here he speaks to Mike Norman at Hard Assets Investor about the outlook for the US and global economies, and how that will affect the widely-expected changes to US Fed policy...
Hard Assets Investor: If you look at the job numbers, gold and commodities markets fear maybe a Fed rate hike sooner rather than later. What do you make of it?
Peter Cardillo: It all adds up to one thing: Deflation is not going to disappear any time soon. You alluded to the jobs report that's being strung. Indeed, it was a very solid report. But there are still missing links to that report, and I'm just going to point out what Yellen said a few weeks ago: "Wages are not really growing." And that's what we saw on this month's Friday jobs report.
HAI: Right; that's been the case for a long time.
Cardillo: Yes. If you look at the quality of jobs, the service sector, most of those service sector jobs are not high-pay jobs; therefore, minimum wages. So no threat to wage pressures anytime soon. So what does that tell me? That the Fed is not likely to remove any language just yet.
Are interest rates going up this year? Yes, they are. But I don't think in June; I think rather maybe September/December, and here's why: Nothing has really changed. At the same time we've got a new event in Europe: The ECB buying German and Italian bonds for the first time, so that's more QE.
Printing paper is fine, because they need to get confidence back. And there is confidence building within Europe, but it's going to take a long time to get the economies going, at least getting out of this steep recession they've been in.
Second, Greece is back in the news. It has never been out, and it's still not written in stone whether Greece is going to exit the EU. I don't think it will, but I think there's going to be a lot of bumps along the way.
Most importantly, the slowdown in China. That's going to be big news in the coming months. That doesn't mean China is headed for recession, but with the US economy growing around 2.5, 2.75% right now, Europe stuck in the mud, Asia going south of the border in terms of real strong growth, that adds up to one thing: moderate global growth.
I think the Fed is going to take all of these things into consideration. And last but not least, the most important thing that I fear is geopolitical problems. The situation between Ukraine and Russia is far from over.
HAI: The factors you mentioned in Europe, China, slowing down – that explains the weak commodity price environment we're in?
Cardillo: In part, yes, absolutely. And the other part is obviously a strong Dollar. Now, why do we have a strong Dollar? Because we're the only major industrial country right now that's growing at 2.5, 3 percent and there's no inflation. So it requires a stronger Dollar.
HAI: But isn't it also because of the disparity in monetary policy outlook? People are looking at the Fed as being close to its first rate hike in seven years.
Cardillo: Exactly, absolutely. Remember, we finished printing money; now the rest of the world is printing money.
HAI: What do you make of the collapse in oil prices, especially given the geopolitics you mention?
Cardillo: It was maneuvered by the Opec nations, and Saudi Arabia mostly, just trying to keep market share. Remember, the United States has been pumping a lot of oil. We've never had so much prosperity in the energy sector as we have now.
HAI: We've added something like 5 million barrels a day in production in the last five years. It's been amazing.
Cardillo: That's created this overabundance of oil, and Opec seized the moment and said, "Okay, it's time that we begin to cripple some of this production so we don't lose our market share."
HAI: How much of that was also an attempt to hit Russia, bring oil prices down?
Cardillo: It was political, of course, that could be one of the reasons. I'm not saying it is, but obviously that makes a lot of sense. We don't hear anybody in the government really talking bad about Opec, do we?
HAI: Let me ask you about gold, because gold has been a disappointment, I think, for a lot of investors. We didn't see a sustained price increase when everybody was worried about the money printing, as you mentioned. Now with geopolitical events, we still don't see really much of a reaction in gold.
Cardillo: True and not true. True, because the price didn't continue to climb. Not true, because the price came up from the mid-$250s back from the early 1980s up to, what, almost $1800?
HAI: Over $1900. It's $1,100 now.
Cardillo: Well that's a huge jump for the price of a commodity. It's only been in the past year and a half, two years, that we saw this correction. I think it's in just a trading range mode right now. And after that, I think we're looking at $1800, maybe $2000.
HAI: What do you see for the remainder of this year? Basically more of the same?
Cardillo: I think so. I think equities are going to do okay this year, but I would sell any strong rallies and raise some cash because I believe that by the end of March, beginning of April, we're headed for a correction which should be mostly technical, not fundamental.
That should shave some 8 to 10% from the indices from the present levels. So if the market continues to rally over the next two weeks – which I expect it to do, and I think that it misread the February employment numbers – and so I think that's a chance to raise some cash.
HAI: All right. Peter, thanks very much. Always great to have you. is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

See full archive of Hard Assests Investor.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals