More negative economic data flooded Wall Street Thursday (December 4). News of more job cuts at companies like AT&T and several commentaries noting a deep recession for 2009 contributed to the sour mood. In the last several months, it’s as if many financial sectors have been flipped on their tops. Oil has gone from all-time highs to long-term lows. The dollar has seen massive moves against many currencies. And, the big “I”, inflation, has now been replaced with the big “D”, deflation, as a major economic concern for the near future.

For much of the early to mid part of 2008, the Fed had to worry about stagflation as it lowered its fund rate to spark the economy. While lower rates are designed to encourage economic growth through business expansion and consumer spending, they also serve as a potential catalyst for inflation, or rising prices. Fortunately, inflation never got too far beyond the range preferred by the Central Bank. This allowed the Fed to continue to focus on the economy.

Now, with oil below $44 and gasoline prices dropping for the 77th consecutive day, many economists are speculating that deflation could be the next economic crisis – not just for the US, but globally. Deflation is the persistent decrease of general prices over a period of time to the point that prices move below zero inflation. Basically, prices are trending downward. Though good in the short-term for consumers, rapid deflation can have seriously bad effects on economic growth, business growth, jobs, and ultimately the economy as a whole.

The dollar is in the tank against the yen. As economy uncertainty persists, the dollar, currently worth fewer than 93 yen, is likely to move lower. The dollar index is also expected to fall in the near future as a recession persists. What are speculators and savers going to do to protect their assets when cash is no longer king?

Gold has long been and continues to be the safe money bet. The most widely respected natural resource as a monetary holding, gold has often been used by investors as for financial safe keeping during slumping economies. This is especially the case with the US. When the dollar is weak, gold tends to gain strength since the US maintains a significant reserve of gold. If the government takes safety in gold, it makes sense that speculators would as well.

Gold is currently at a spot rate near $780 per ounce. Historically high, this is about $240 off all-time highs from mid-2007. However, a peak at trend charts for gold in the last year show that gold appears poised for a directional move of some sort. The one year trend line is converging to the point that a break out seems inevitable. The question is what direction? With a weak dollar, an uncertain economy, and safety being a first priority, it is hard to imagine gold not moving back up in the near-to-medium terms.

Goldmoney.com founder James Turk, a highly regard gold expert, has long maintained that gold will reach $8,000-10,000 per ounce by 2013. He maintains that gold has not risen properly with inflation since it began floating against the dollar. With the daily rapid movement in financial markets these days, anything seems possible.

Market Recap

The Dow posted a 182 point gain on Wednesday in spite of several negative economic reports. This was the seventh day of gains out of the last eight. Auto sales posted historic drops in November. Thursday, the Dow gave back 215 points with the NASDAQ and S&P off by 46 and 25. The dollar dropped below 93 yen. Oil fell below $44 per barrel. Bernanke announced intentions for more Fed moves to curb foreclosures. Friday morning is the jobless claims report.

Neil Kokemuller
Thursday, December 4, 2008
9:25 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.