Manufacturing Mythos

So the President is coming to Pittsburgh on Friday to talk about manufacturing.  We may be at the point now where people forget how much manufacturing was lost here.  At the beginning of the 1970’s the region had just over 325 thousand manufacturing jobs.  Depending on the month, we are around 90 thousand today.  It’s almost hard to imagine the region if we took Pittsburgh today and added in the net 235K manufacturing jobs that were lost.  It’s even a bit hard to figure where we would be right now if we just added back in the 40 thousand or so manufacturing jobs lost in just the last decade.  Yes, that really is the story of late.  It’s not all ancient history and 40K manufacturing jobs that were here in 2000 are not here now.  Whatever story you want to paint on how Pittsburgh is doing economically, you have to talk about it realizing the story includes continuing hits. Not just the manufacturing loss, but all the USAirways jobs as well for that matter.

Anyway, this is what the long term manufacturing trend looks like. Still scary to look at and it’s just lines on a page. Each job was someone’s career, in most cases their only career, and in many households the only wage earner. Lots of pain in that graph.

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Clif Droke: Gold, the Investor Safe Haven du Jour

The yellow metal has maintained its relative price strength during the most recent financial market correction, and gold is now closer to its all-time high than most stock market indices. As an illustration of gold’s leadership, note the following chart. At no time in the last four years has the performance of the benchmark S&P 500 Index (SPX) outstripped that of gold. The following chart compares the relative percentage performance of the SPX versus the iShares Gold Trust (GLD), a popular and heavily traded gold ETF that tracks the gold price.

cliff droke

As you can see, gold has dramatically outstripped the stock market in terms of relative percentage gains over the last three years since the U.S. economy went into recession. Gold has been the major beneficiary of safe haven funds, as investors rushed to buy gold as a defensive investment. What many analysts are wondering, though, is how much of the gold bull market of recent years is due to safe haven-investment flows and how much is due to other factors, such as industrial and jewelry demand.

A Gold Demand Trends report released on May 19 by the World Gold Council (WGC) suggested that much of gold’s gains in the first quarter of 2011 were driven by growing demand from China and India. Analysts have pointed out that the increasing prosperity of those two countries has made it easier for its citizens to purchase gold bullion, in coin and other forms, but primarily as jewelry, which in India serves the dual role of decoration and personal investment.

The WGC report estimated that Indian households own more than 18,000 tons (18 Kt.) gold, making the country the world’s biggest holder of gold. By comparison, official gold reserves in the United States total about 8,100 tons. Commenting on these statistics, BusinessWeek magazine wrote: “Indian consumers aren’t done buying: In this year’s first quarter, they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. And China’s appetite is growing rapidly and could soon overtake India’s.”

BusinessWeek found that if Chinese and Indian demand is stripped away, “the rest of the world’s hunger for gold isn’t nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out. But a global flight to gold as a hedge against Armageddon doesn’t appear to be taking shape.”

There is reason to believe, however, that this conclusion is mistaken. To begin with, jewelry demand doesn’t account for the bulk of the tremendous run-up in gold’s price over the last few years. Gold’s strong performance can be linked primarily to the following four classes of buyers:

  1. Individual investors
  2. Central banks
  3. Hedge funds
  4. ETF holdings

Individual investors in Western countries bought gold as a safe haven investment in the aftermath of the 2008 credit crisis, for obvious reasons. Fear was very high in 2009 and 2010, and demand for gold and silver bullion coins in many categories hit record levels. The extraordinary increase in gold’s cost-per-ounce may have pushed many marginal players out of the market in the last year or two, but that demand was easily supplanted by institutions and hedge funds. Indeed, the appetite for gold displayed by these big money investors has been an oft-overlooked factor in gold’s upside run since 2009, just as it was in the years preceding the 2008 financial collapse.

Gold Fields Mineral Services (GFMS) recently published the 44th edition of its annual survey of the world gold market, Gold Survey 2011. According to GFMS, gold investment demand last year continued to drive the gold price higher; it rose nearly 26% in 2010 on an annual-average basis. GFMS noted that global gold investment in 2010 was the second highest on record, while world gold investment set a new high last year, in value terms. ETF holdings, notably, experienced the second highest annual gain in 2010 according to GFMS.

In more recent times, added to the list of key drivers behind the metal is a fifth major player—academic institutions—which have been increasingly looked to the yellow metal as a long-term investment. It was reported in April that the University of Texas Investment Management Co., which also handles Texas A&M, had 5% of its $19.9-billion endowment in physical gold bullion. The endowment took delivery of 6,643 bars of gold (664,300 oz.) in what is widely regarded as an extremely unusual move for a typically conservative university endowment.

This may not be the “flight to gold as a hedge against Armageddon” that BusinesWeek talked about, but it makes you wonder what exactly the folks at Texas Investment Management Co. are so concerned about that they would take delivery of physical gold. Perhaps, they know something the rest of us don’t.

If not Armageddon, what reason(s) could there be for owning gold in the years ahead? When it comes to evaluating gold’s long-term prospects, two factors must be considered. Within the typical lifespan of an investor, there are two major periods to buy gold. The first is in the face of hyperinflation, due to its proven performance as the ultimate hedge against an erosion of purchasing power. For example, in the hyperinflation that began in the late 1960s and lasted until about 1980, gold went from $35/oz. to around $800/oz.—proving its utility as an inflation hedge.

The second time to buy gold for the long term is in the face of economic collapse or financial market volatility, as gold has a proven record as the ultimate storehouse of value. For instance, after peaking in 1980 when hyperinflation ended and disinflation began, gold bottomed in 1999 at about $250/oz. at the beginning of economic winter. It has been going up since then, notwithstanding temporary setbacks. If history repeats, gold should begin to accelerate when economic collapse comes to bear, as we approach the fateful year 2014, when the 60-year long-wave, or Kondratiev wave, cycle is scheduled to bottom.

As Cycle Analyst Samuel J. Kress has observed, any portion of the similar increase from 1966–1981 bodes for astronomic prices in gold from here. In recent decades, the buy-and-hold mentality for conventional equities worked until revolutionary changes at the turn of the century retired this strategy along with the buggy whip. “Consequently,” he said, “replacing that gold will be the contemporary equivalent [of equities] and investors should retain long-term positions in gold and add to positions on interim corrections.”

Regardless of whether the economic-Armageddon scenario comes to fruition, there are several reasons gold will maintain its long-term bull market, which began at the turn of this century. If you believe the government will continue debasing the U.S. dollar, the gold price will benefit from this debasement policy. If, on the other hand, you believe the economic, Kondratiev winter of the 60-year cycle will accelerate in the next few years, history has proven conclusively that gold should once again be the safe haven du jour for investors seeking asset protection. Armageddon or not, gold’s long-term prospects are still promising.

Clif Droke is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday. He is also the author of numerous books, including most recently, Gold & Gold Stock Trading Simplified. For more information, visit

Economic Events on June 22, 2011

The Mortgage Bankers’ Association purchase index will be released at 7:00 AM EDT, providing an update on the quantity of new mortgages and refinancings closed in the last week.

At 10:00 AM EDT, the FHFA House Price Index for April will be released, providing more information about the direction of the housing market.

At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.

At 12:30 PM EDT, the FOMC Meeting Announcement will be made, which will provide insight into how long the Federal Reserve plans to keep rates at 0%.  It is assumed that there will be no immediate change in the Fed funds target rate, but any hint that rates could rise in the future could have an impact on the bond market and stock market.

At 2:15 PM EDT, Federal Reserve Chairman Ben Bernanke will hold a press conference to discuss the FOMC economic projections.