Gold and Silver in a Sick Economy

The US outlook is not as positive as some people make out...

AMERICA'S economy may not be quite as robust as some government statistics indicate and more stimulus could be on the way, suggests Morgan Report contributor Chris Marchese in this interview with The Gold Report.

Chris Marchese says he expects precious metals will go higher as investors seek protection from the effects of monetary policies that don't work. In the process, he expects that greatly undervalued mining shares of silver producers will again shine in the eyes of investors. 

The Gold Report: This is an election year and everybody is waiting to see what happens with the US economy between now and November. The Federal Reserve just signaled that it may be less willing to provide more stimulus. What's your reading on that?

Chris Marchese: The Fed meeting minutes signaled that the members are willing to be very accommodating if gross domestic product (GDP) slows down, if it doesn't maintain a 2% inflation rate and/or unemployment starts to creep back up. Then they tried to play the metals down; they don't like high gold or Silver Prices because they delegitimize the Dollar. I think they are doing that in preparation for the next round of quantitative easing, which in my opinion will just be an extension of Operation Twist that ends in June.

TGR: So you think that's all pretty much in place, regardless of how numbers look, unless there's some drastic change?

Chris Marchese: Yes, real GDP is supposedly growing, but our deficits are running higher, and 21.5% of that is government spending, which doesn't include any Social Security or the like. If you take that $3 trillion (T) out, our economy is smaller or roughly the same size as it was back in 2006. So there hasn't been a recovery, even though they try to paint it that there is.

I can make the argument that things have gotten worse. There hasn't been any growth, and unemployment has been getting worse if you count discouraged workers, people no longer considered unemployed and people forced to take part-time jobs or jobs that they're overqualified for. John Williams of shadowstats.com calculates these numbers. Last month, it was almost at a record high of 22.5%. Even the US Bureau of Labor Statistics has it at 15%, and it hasn't really budged. 

TGR: What happens if the recovery stalls—or if it takes off faster than expected?

Chris Marchese: I think that Fed Chairman Ben Bernanke and President Barack Obama might do stimulus, tax cuts or something like that to get a short-term hit. It's like heroin, you get a short-term high, then you come down hard again. We've been doing that since we got rid of the gold standard altogether. It's just the boom/bust cycle that eventually runs out when no one trusts our currency anymore. A growing population is already starting not to trust it. Politicians like to talk the talk—"Oh, we're going to cut $2.6T over the next decade." 

Well, it's going to be out of control by that point. Everyone should read the GAO Report, written by the people who audit the government. The phrase "material weakness" is used 50 some-odd times. If that was the case when we filed our taxes, we'd be thrown in jail.

TGR: What do you think the chances are for inflation getting out of hand?

Chris Marchese: I think it's already a problem. I use what's called True Money Supply, which is basically all currency that's readily available for use and exchange—currency, coins, notes, checkable deposits, savings deposits and the like. That's been growing between 10% and 15% over the last three years. 

TGR: What's going to happen with precious metals if the economy stalls, or if inflation really picks up?

Chris Marchese: I think it's a win-win either way. For one, as opposed to the 1970s, this is an entire-world problem. China has inflation. Argentina has inflation. Europe is going to have inflation. Everyone is running the money spigots nonstop. I think Bernanke is not going to let this economy stall. It's either going to take off through inflation and people will go to the metals, or he'll do another stimulus and if that doesn't get things going, he'll do another and another. 

At some point, it will be too much. Either way, I don't think the metals will do anything spectacular until the end of the summer. At that point, if the economy is not looking good enough, I think Bernanke will do everything in his power to make Obama look good to get reelected. 

TGR: Do you have any predictions for gold and Silver Prices?

Chris Marchese: I think in Q412, we'll break $2,000/ounce (oz) in gold and $50/oz in silver. It could run up as far as $60–70/oz just because of the technical buying and no overhead resistance at $50/oz. Toward the end of 2012, it could be $55/oz silver and $2,100/oz gold. That might sound outrageous now, but last April silver ran from $32/oz to $49/oz in the blink of an eye. 

TGR: What would you like to leave as a final takeaway for our readers on how to best play this nervous market? 

Chris Marchese: Try to buy quality. Buy on dips. Always keep some cash in reserve because, as we know, things can go lower. You don't feel as bad when you have money left to deploy if a stock you like drops by 50%. Remember that negative sentiment in the market is a good thing. That's usually the sign of a bottom or a bottoming process. The average investor gets scared out of the market and sometimes liquidates his or her position at the very bottom. Understand the fundamentals of silver and gold. They are money and have been for thousands of years. Above all else, own the physical asset, then dabble in some mining companies. 

TGR: Thanks for joining us today. 

Chris Marchese: Thanks a lot.

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