World Financial Watch

Many wonder if they should buy precious metals in light of the current economy.  Gold and silver have seen dramatic increases over the past year only to drop back from their highs.  Gold reached just over $1889/ounce and silver hit $48.58/ounce.  Gold had dropped off 16% from the highs in August to the low in late September but it has regained most of that territory.  Gold is now just around 7% down from the high point.  Silver on the other hand has seen more dramatic swings.  Silver reached it’s high in late April and has stair stepped down since to it’s low around $30/ounce in late September.  That’s around double the losses seen in gold.  Silver has regained some ground but it is still around 28% off the high.

Now that we’ve looked at the recent history let’s look at the question of whether or not you should buy these metals.  Most experts agree that precious metals are a hedge against inflation.  What is inflation?  Inflation is the overall rise in prices and and overall lowering of purchasing power of money.  Are we at risk of inflation?  There are differing opinions but most agree that inflation is going to continue at a moderate pace.  Some are warning of impending hyperinflation siting the run up of debt over the last 40 years and the dramatic increase of food and energy (which are left out of core inflation numbers in government statistics due to “volatility”).

So inflation may be a reason to invest but will we see further increases in the value of gold and silver?  No one can predict values 100 percent but there are indication that we could still see value increases in both gold and silver.  Over the last 10 years  gold has realized gains of  547% and silver has seen an increase of 737%.   Some believe that the recent fall back in the price of precious metals was just a market correction due to the rapid gains being made.  Others believe that the drop was caused by the mainstream media declaring that the bubble had burst on precious metals.

Public sentiment can be fickle and what was hot one day can drop like a rock the next, look at Netflix for example.  The sell off that caused the drop in gold and silver prices may actually be an opportunity to buy before the price go back to and even beyond the highs obtained this year.  Some think gold could go up to $5,000/ounce and silver could get to $125/ounce.  While I’m not quite that bullish, I do think that both will see significant gains over the next few years.  The volatility in the global economy the increased demand for gold and silver in not only tech sectors but also by individuals leads me to believe that we could see more huge gains in these metals.

Greek Prime Minister George Papandreou stepped down as prime minster of Greece amid the country’s financial struggles but is it too little too late?  After his idea on a national referendum on the new EU bailout flopped Papandreou seemed to have lost the confidence of not only the people but the government as well.  The global markets have been reeling as this small country has been on the verge of collapse.  The fear is that if Greece fails it could pull down the value of the Euro and throw the other members of the EU into further financial difficulties.  

The beginning of the end for former Greek Prime Minister George Papandreou happened when he stated that he wanted to put the latest EU bailout up for a national referendum.  This was not acceptable to the EU because if the people voted against the bailout Greece would most likely collapse relatively quickly throwing the world into further economic decline.  The Greek people did not like the strings (or conditions) attached to the new bailout.  Public sentiment seemed to be that they should reject the bailout.  Papandreou was caught between the proverbial rock and a hard place.  Either he could thumb his nose at seemingly the only people who could keep his country afloat or retract his offer to let the people speak.  

He chose the latter and the Greek people did not respond well.  ”The public in Greece is concerned about the stringent austerity measures being imposed as a condition of the bailout.  The most recent plan includes civil service pay cuts, job and pension cuts, higher taxes and a 50-billion-euro privatization plan across a wide range of enterprises, ranging from ports to utilities to the state lottery.”  SOURCE   The problem is that everyone wants help but they do not like it when those helping place requirements on those receiving the aid.  Many in Greece say that the EU is too controlling and that Greece should pull out.  

That would only serve to further drive Greece into the ground since their debt far exceeds what they bring in.  On a smaller scale look at the entitlement programs in the US.  After years of having housing, food and even medical expenses offset or even totally paid, many have become dependent on the government.  If the government tries to place new restrictions or conditions on these programs the recipients claim they have no compassion for those in need.  

The entitlements in America are unsustainable as are the bailouts in the EU.  The EU has the right and the obligation to other member nations to place these external restrictions on Greece as a condition to the bailout in order for Greece to turn the financial crisis around. So is it too little, too late for Greece?  Time will tell but it was an important step to renew the government as well as the country’s resolve to avert future crisis.

Many people are wondering why the Greek economy is having  such a major effect on the global markets.   Why is such a small country making the world’s major markets rise and fall with every headline that comes out regarding their possible economic collapse?  Fear of the unknown is driving the seemingly schizophrenic markets up and down like a yo-yo.  When Greek Prime Minister George Papandreou presented the idea of a referendum on the bail out uncertainty and fear grew to a fevered pitch.   The masses in Greece did not want to submit to the changes that would be required by the European Central Bank (ECB) for the new bail out loan, but the government believed that without it the economy will totally collapse.  There are two major components to this issue.  First is the chance of Greece defaulting on the bailout loans that they have already been given.  The second has to do with the chance that they could pull out of the Euro as a currency.

When we consider the problems that would occur if Greece defaults, we have to look at how this would affect the lender countries.  Large banks in Germany, France and England have propped up Greece with loans. Greece is not an insignificant economy and it’s failure would send ripple effects throughout the world, think “too big to fail”.  They are also intricately linked to Greece through the European Union (EU).  Many think that if Greece defaults, other members might default as well. The Wall Street Journal stated, “The decision by Greek Prime Minister George Papandreou to shelve the poll capped a tumultuous few days that thrust Athens to the brink of political chaos and forced Europe’s leaders to contemplate Greece’s exit from the single currency.” Source  That brings us to the other major issue. Greece might pull out of the Euro as it’s national currency.  As the seventeen member nations of the EU consider the possibility of Greece rejecting the euro the fear is that other member nations may also follow suit.  This would cause a major destabilization of the remaining EU member’s currency and ultimately their economies.

Some think this is just a problem for the EU, saying, “sure it will impact us but it isn’t really a problem for the United States.”  Unfortunately that is not true.  Many of the large American banks issued default insurance to the banks that were lending to Greece and other struggling nations. If Greece (et al) default, then these major US banks will have to pay out billions to cover the losses.  These are many of the same big banks that were bailed out by the American taxpayer just a short time ago.  Their “toxic” debt was graciously passed on because the government deemed them “to big to fail”.  Sound  familiar?   So there is a very good reason for us to keep our eyes on the developments in Greece  and other EU countries that are at risk of default.  Now, it would seem that we’re tied to their future.

The current spiral of the United States economy can be attributed to several factors.  Of these, high gas prices, the Federal Reserve lowering interest rates, and sub prime mortgages are key contributors.

With gas prices at an all time high, it is no surprise that consumers are buying less.  They are spending more money just to get to work every week, and the thought of using excess gas to go on vacation or a shopping spree is enough to make you shudder.

The Federal Reserve also plays its part in the weakening of the US dollar.  Trying to avoid another bank scare (everyone withdrawing their money out of the bank at the same time) the Fed is lowering interest rates making the dollar worth less.  Not worthless, but worth less.

Finally, sub prime mortgages were a big influence on the current downturn of the dollar.  Basically, sub prime mortgages are to help people with less than great credit buy a house.  They were also developed to help those who didn’t make quite enough money to substantiate a prime loan for the amount the house they wanted was worth, so they are offered a sub prime loan, at a higher interest rate, for more than they would have qualified for a prime loan.

While this sounds like a great idea, the problem happens when the interest rates go up, and they did.  There were many people whose salaries could not cover the cost of the higher interest rates and so they foreclosed or simply walked away.

It does seem like the economy could be headed into recession, but it is not for certain yet. As with most issues dealing with money, it is a game of wait and see.

The Federal Reserve is playing the waiting game with the stock market.  With oil prices rising to over $120 per barrel, inflation is growing threat.  High gas prices and groceries are causing American consumers to cut back on other products.  This is stifling the US economy to the point that the government is talking recession.

Sub prime mortgages have also played their role in the downward spiral of the stock market.  Banks have given out mortgages to people with less than perfect credit at higher interest rates.  When the Federal Reserve raised interest rates, however, a lot of homeowners found themselves unable to pay the higher rates.  Many people had to foreclose or simply walked away from their homes.

As a combative measure, the Federal Reserve has been lowering interest rates.  They have stated that the recent rate cuts should be over for now, though.

The US government recently started an economic stimulus package to help with the economic downturn, as well.  The package gives each taxpayer $600, couples get $1200 and $300 for each dependent child.  These incentive checks were sent out to counter the high prices at the gas pumps.  There is also the hope that the American consumers will take these checks and use them to buy products, helping to stimulate the economy.

The Federal Reserve has recently been lowering interest rates in order to combat issues involving the real estate market.  Prices of homes are falling to the point that the houses themselves aren’t worth as much as the buyers’ mortgages.

Sub prime mortgages are a big factor in what is going on in real estate right now.  Basically, banks starting giving out loans to potential homebuyers with less than perfect credit at a higher interest rate than their high credit rating counterparts, allowing them to buy homes that they would not have been able to purchase otherwise.  This happened during a period when the Federal Reserve had interest rates fairly low.  When the Fed later raised interest rates with the fluctuating economy, many of these homeowners found themselves unable to make the payments on their homes.

A substantial amount of these people had no other choice but to foreclose on their homes, or worse, simply walk away.  Now, with the price of homes floundering, banks are left not with interest yielding mortgages, but depreciating homes, losing money.

With the sub prime mortgages allowing so many more people to buy homes, houses were being constructed in record numbers.  Unfortunately, now there are entirely too many homes on the market, and not nearly enough buyers.  This excess of housing is causing the prices of homes to fall, which furthers the vicious cycle.

With crude oil prices over $120 per barrel, it is no wonder that gas prices are so high.  Oil prices affect not only gasoline, but everything that revolves around gasoline as well.  Groceries are more expensive, anything that is delivered by a semi truck is higher, and even something as simple as ordering a pizza is costing a little more these days.

Oil companies are having a hard time keeping up with the rapid growth of India and China.  If these trends continue, it is likely that oil prices could reach $200 per gallon or more.

Oil prices are also affecting the rest of the economy.  With people spending so much more money on gas and groceries, they are spending much less on other products.  As this continues inflations is becoming an ever growing threat.

The government has constructed an economic stimulus packet to help compensate for high gas prices and also to help stimulate the economy.  By sending out free money, they are hoping that people will run out and start spending, however, recent polls show that most people will be using the free money to pay bills or to invest.

With prices continually rising and no end in sight, the world may be forced to look for an alternative fuel source to combat recession.

With gas prices reaching $3.50 per gallon in places, it might be time to look into an alternative to your 1969 Chevy pickup with the 350 big block engine.  Here are just a few tips that might save you a little money.

Try carpooling.  I know that riding in a car with that guy who is just way too perky that early in the morning for his own good may seem daunting, but it could cut your gas prices in half just by riding to work with someone.

Public transportation is a cheap and effective way of getting around.  An all day bus pass usually runs around $5.  If the old lady across from you beats you with her cane again, you can always move seats.

If you are planning on buying a car, look into a hybrid.  Not all hybrids are alike, though, so research your options before you buy.

Riding a bike is a cheap and healthy way to get around as long as you don’t live too far away from where you are going.

There is also one other mode of transportation I would like to suggest.  It was invented at the beginning of time, so you know it is tried and true.  Walking! It is the cheapest and healthiest way to get around.

So whether you want to save money or you are just looking to ‘stick it to the man,’ here are some ideas to help you reach your goal.

With gas prices and unemployment rising, the real estate market and the US dollar declining, knowing how to protect yourself during tough times is indispensable.  Here are just a few suggestions that might help.

One of the first things that many people cut from a budget in hard times is insurance.  This is one of the most important financial protectors you can have in a rough spot.  Keep your medical, life, mortgage and auto insurance.

Try to cut back on expenses that aren’t necessary.  That seems like an obvious solution, but really go through what you are spending each month and prioritize what is necessary and what you can live without.

Work with your creditors.  If things get really bad and you can’t make a payment, don’t shut off your phone and throw your mail away.  Try talking to them to work out some kind of payment plan.  If your credit score goes down because of a collection, it can increase payments on all of your other bills.

Make yourself stand out at work to prevent being a casualty of a layoff.  Show your employer they cannot run their company without you.

Most of these tips are obvious, but a lot of people wait to implement them until it is too late.  If used as a preventative measure, it is possible that you can survive and even thrive in a tough economy.

With such a huge demand for gold coming from around the world, it is no wonder that the price is projected to reach an almost unbelievable $1000 per ounce.  One of the biggest importers of gold is China, constituting a large chunk of the price hike.  Most of the gold usage is jewelry related.

Supply is also a factor.  With such a high demand, gold is becoming scarcer.  Miners are searching for new sources to combat the possible shortage.

Another reason for the increase is the decline of the US dollar. Gold and the US dollar move inversely in value: when the dollar goes down, the price of gold goes up.

The Federal Reserve has a lot of control over the value of the dollar.  When it raises interest rates, usually the value of the dollar goes up.  Now, with the Fed lowering interest rates in hopes of promoting trade between banks, the value of the dollar is going down and so, the value of gold is going up.

If the US economy keeps heading in the direction it is going, at least for awhile, then we will almost surely see gold hit an all time high.