Us Consumer Confidence Up But Consumer Spending Down
This is not a comedy of errors, but a real life scenario
, where the Consumer Board survey suggested a strengthening of the consumer confidence in November, but US GDP growth took a beating on the back of constrained consumer spending.
While, suggesting stronger consumer confidence for November, the Conference Board also suggested that US consumers continue to be anxious about the state of the US economy and are in a frugal spending mood.
From these developments it may be inferred that, while consumers are jittery about the current status of the US economy, they believe that things are set to change for the better in the future. However, the Conference Board also suggested that consumer expectations about future incomes are also not very encouraging.
With the consumer index bouncing to 49.5 in November from the level of 48.7 in October, there appeared to be some reason to cheer for retail stores to hit a good sales patch.
But a rise of 10.2% in the unemployment rate in October, which is the highest since April 1983 does not support the bounce in consumer confidence and sales may stay subdued.
While, confusion prevailed on the state of affairs on the consumer front, US GDP growth was revised to 2.8% from the 3.5% earlier for the previous quarter. The downward revision in the annualized GDP growth rate was attributed to a jump in imports, which count as negative for the GDP calculations.
The downward revision in the US GDP seems to have hit the US stock markets hard and earlier gains gave way to losses. While, the positive GDP growth was encouraging after successive quarters of negative growth, the below expectation figures seem to have dampened the stock markets.
However, this news did not immediately prop the dollar from the risk aversion angle, but made the dollar weaker against the Yen. This seems to suggest that investors might not be considering the dollar as a good risk hedge due to the sustained weakness in the US economy and chose the Yen as the hedge currency over the US dollar.
Could this be reflective of a long term weakening of the US dollar in the eyes of the investors? Other developments also seem to suggest that there is a move away from the dollar, which could dampen its demand and lead to a gradual depreciation in its value.
For one India's swift act of swapping a portion of its dollar reserves with gold in an outright buy from the IMF suggests that the action of limiting dollar holdings as reserve currency may have already started.
India's purchase of gold from the IMF and the uncertainty of US economic recovery seem to further have worsened the situation for the dollar. Following these developments, gold has climbed to a record price of $1189 to an ounce.
India and the IMF are reportedly planning another gold-for-dollar transaction, which could further worsen the sentiment for the dollar and boost gold prices towards the $1200 to an ounce. The hunger for gold is not limited to the Indian central bank, but the Sri Lankan central bank and the Russian central bank have also recently bought gold from the IMF.
Other central banks may also be planning to beef up their reserves by dumping some dollars for gold. But, a word of caution for all investors planning on a gold strategy.....irrational exuberance and overshooting in gold prices is likely to occur due to the herd mentality of getting after one commodity.
Thus, at a particular point, the dollar could be sufficiently weakened and may be the time to strike gold by buying the dollar cheap. After this irrational price point of gold, as the overshooting corrects, the dollar is likely to bounce back and investors, who detect an appropriate price point, could reap good windfall profits.
by: Pete Migz
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