There are many reasons why most Americans don’t yet own any gold and silver for investment or insurance purposes. On March 31, I witnessed a textbook example of what I consider to be the most important reason why gold and silver have such a small following in this country.
The event was a presentation by Dana Johnson, the senior vice president and chief economist for Comerica Bank. His speech was titled “The Outlook for a Sustainable Expansion.” The attendees were business executives and government officials whose organizations mostly have accounts with Comerica plus several Comerica managers. Comerica is one of the largest banks to have originated in Michigan, with assets of about $60 billion.
Johnson’s general thesis was that the current recession 1) was not as horrible as many perceive when you compare data with past recessions; 2) had hit bottom in the third quarter of 2009; and 3) is now being followed by a slow economic recovery.
The thrust of his presentation was that the worst was over and that, by sticking to mainstream financial activities, the country would come out of its current financial doldrums. The recovery would not be strong or necessarily fully return to early 2007 levels, but there was reason to expect that the economy would generally improve from now into the future. By implication, he thinks the value of the US dollar will not fluctuate enough to be of any concern worth mentioning.
Johnson showed a number of tables and graphs to the audience to support his thesis. He presented data covering gross domestic product, employment, inflation, housing, mortgage rates, automotive industry sales, Federal Reserve purchases of US Treasury debt, and state business tax burdens. Some data was national and some covered only Michigan. One area that Johnson mostly avoided was political issues.
On the basis of the information he presented, Johnson appeared to make a solid case that staying the course was a prudent course of action for businesses and investors. In other words, he made an argument against the need to own gold or silver as protection against calamities affecting the value of paper assets.
Johnson’s presentation matches closely what many mainstream analysts are saying. It is the same information that is widely reported in the mainstream regular and financial media. If this data was accurate and sufficiently complete, I could agree with Johnson’s thesis. On that basis, I would not think owning gold and silver was worth consideration.
Unfortunately, as Johnson went through his presentation, I came up with a constant stream of “Yes, but” thoughts that the accurate underlying information to his tables and charts largely contradicted the support he was trying to show for his thesis. As I listened, it struck me that this kind of misinformation and disinformation, dressed up as being “the truth”, is exactly why so few Americans own gold and silver.
Because this presentation was made mostly to non-economists, Johnson did not pin down in detail which source of data he was showing. For instance, some of the statistics are reported as raw data and as seasonally-adjusted data, but only once did Johnson mention which information a table or chart showed.
In Johnson’s discussion of gross domestic product, employment and unemployment, the extent of the recession compared to past history, and inflation, he pretty much accepted US government statistics over time as being both accurate and being accurately comparable over time. However, when I chatted with him briefly after his presentation, he acknowledged that the gathering of such data is not an exact process and that current data is not necessarily comparable to historical data for the same subject.
Johnson said he was not familiar with the work of John Williams (www.shadowstats.com). Williams reconstructs various popular government statistics using comparable methodology as formerly used by the US government to develop past data. For example, the government’s current CPI-U inflation rate is about 2.5%, but Williams calculated it at around 10%. For the Bureau of Labor Statistics definitions of unemployment (U-3 at about 10% and U-6 at about 16%), Williams figured it is now about 21%. For the change in gross domestic product, the BEA index shows is right about 0%, while Williams computed it as -4%. Last, the Federal Reserve board figures the current trade weight average value of the US dollar at 55 (January 1985 = 100) in contrast to Williams’ figure of 50.
The US government (and pretty much all governments) are prone to changing their statistical analysis over time, supposedly to make the indices more accurate. Technological changes over time necessitate such changes. The price of feed for horses is no longer a component of transportation costs, while the price of gasoline has become very important, to give an extreme example. There are also quality changes, such as the features of an automobile today versus just two decades ago. While modifications are necessary, it somehow always seems that the changes made by the US government just happen to make the future statistics look more attractive, for purposes of the US government, than the previous methodology. Thus, unemployment and inflation is now understated and gross domestic product and the value of the US dollar are overstated.
If there were accurate statistics for these categories of data, and Williams’ analyses are not necessarily on target, my expectation is that the tables and charts that Johnson presented would not support his thesis that the worst is over and the economy is starting to recover.
There are also many kinds of data that could be cited. I noticed that Johnson omitted some key statistics that would have contradicted his thesis. In some ways there is too much information available and filtering of data is necessary. That makes it is easy to present only what supports a concept. As an example, Johnson showed data on 30-year residential mortgage interest rates, showing that levels have been stable at low levels for the past several months. What he did not show was a chart of the interest rates for the 10-year US Treasury debt. The 10-year Treasury interest rates right now are about 70% higher than they were at the start of 2009, just 15 months ago. This latter statistic gives some indication of where future mortgage interest rates are likely to trend. Had Johnson presented both sets of this data, this combined information would not support his overall thesis.
Johnson also was touting the benefit that the Federal Reserve has now stopped purchasing US Treasury debt. The best information I have is that this is technically true, with a huge “but.” Those who have investigated the issue, because the US government is not reporting such statistics, is that the Fed is supplying funds to its trading partners to continue purchasing Treasury debt. By going this route, the Fed is effectively purchasing such debt, but it is not being reported this way as it is not the direct buyer. It looks like the trading practice has been occurring for at least the past six months. If Johnson were able to dig up accurate information on the amount of Treasury debt that the Fed is still financing, directly and indirectly, this information would not support his overall thesis.
Further, Johnson did not take into account the execution of the orders from the President’s Working Group on Financial Markets for the US government’s trading partners to prop up US stock markets for the past year. Had he excluded the effect of this manipulation, his information on the stock markets would not support his overall thesis.
My comments are not exhaustive at covering every point Johnson raised. They are also not meant to pick on him in particular and are not a personal attack on him. When I chatted with him after the presentation, I found him well versed in the specifics of the data he cited and keenly aware of the limitations of the reported statistics.
In my judgment, his presentation was representative of what is being widely reported to Americans, even though I believe that the effect of such data can lead people to make poor financial decisions.
Instead, I want to highlight how an effort to dig up accurate underlying information can lead a prudent person to conclude that the economic and financial outlook is not as optimistic as Johnson and a myriad of mainstream economists and analysts try to claim.
If the US and world economies are not past the bottom of the cycle and are not on the roads to recovery, then owning some gold and silver can be a reasonable and conservative step to take for wealth preservation.
I think that if Johnson’s presentation had included additional information such as I listed above, it would show that inflation and unemployment are much higher than generally perceived and that the value of the US dollar and the decline in US gross domestic product are worse than believed. Such data would spur more Americans to move at least a portion of their assets out of the US dollar and paper assets such as stocks and bonds an into owning gold and silver. Instead, now these Americans are lulled into inaction. Unfortunately, I expect that the coming financial crises will force many more people into buying gold and silver, but only after prices have reached much higher levels.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/