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Friday, 10th April 2015

An Earnings Recession Coming Up  

In our view, you cannot know much about the future of the gold price by studying the gold price. This is a contrary view to many, who continue to pore over charts of the gold price for hints as to its future. Jewelry demand, mine production, central bank purchases and sales are also completely useless, in our view.

If you want to understand what gold is doing and what it is likely to do, you have to study the markets for financial assets. Essentially, the gold price is the reciprocal of paper asset valuations. As confidence in stocks and credit instruments grows, gold is less attractive and as this confidence wanes, gold is more in demand. Investment demand drives the gold price and investment demand is driven in turn by loss of confidence in all the lovely creations brought to you by Wall Street and its sponsor and backer of first and last resort, the Federal Reserve.

We may be about to have religious experience in stock land. For more than five years, we have been told that US stocks are up because they deserve to be up because their earnings are up and earnings will continue to grow because the economy is getting stronger. Until now.

A few days ago, the US Commerce Department reported that corporate after tax earnings for the fourth quarter of last year fell 3% from the preceding quarter. Earnings projections for the first quarter of this year look like they will also be down from the previous quarter. As Fred Hickey points out in his April 3 letter, negative earnings preannouncements have been exceeding positive ones by a ratio of five to one. And then there is the problem of forward guidance for the second quarter of this year; based on the stronger US dollar's impact on earnings to date, we could be looking at three quarters of falling earnings-potentially enough to break down the stock market and send money looking for another home.

Will an earnings recession weaken confidence in paper assets? We don't have long to wait. The action starts in earnest next week.