10 Predictions for 2010: Economy, Dollar, Gold

Source: Jason Hamlin, Gold Stock Bull  (12/28/09)

It has been said that "the only thing constant is change." While this is true, the rate of that change is anything but constant. If you pause to reflect on how rapidly things are changing all around us, you will realize that momentum is building and the change is picking up pace.

It has been said that "the only thing constant is change." While this is true, the rate of that change is anything but constant. If you pause to reflect on how rapidly things are changing all around us, you will realize that momentum is building and the change is picking up pace.

While some may view this phenomenon with fear, I welcome it and believe that although difficult times are ahead, the accelerating change provides an opportunity to transition into a better societal structure. Not only will the economic and political breakdown clean the slate and allow for a better system to be built, but the rapidity of this change means that we may actually be able to see the changes manifest within our lifetimes. While this is exciting to think about, it makes predictions such as these a bit more difficult to pen.

I've managed to get about 8 of 10 right in the past few years, but admittedly did not anticipate how quickly or strongly the stock market would rebound in 2009. I was also early to predict that deflation would subside and inflation would materialize, although there are some signs of the coming storm.

Here are my 10 predictions or best guesses for what will transpire in 2010:

1. Deflationary Pressure Continues

I know this may come as a surprise to gold investors, but I believe the U.S. and world economy will likely experience a continued deflationary dip during 2010. Banks are still not lending and the expansion of the monetary base is not keeping pace with the massive contraction in the credit markets. With the commercial real estate shoe yet to drop and a glut of production capacity, deflation is the more likely and immediate threat to the economy. I believe the Fed and government pull out all of the stops to fight the deflationary threat. With new consumer stimulus programs, tax rebates, government lending, pressure on the banks to lend and the printing presses running overtime, all of the newly-created money will eventually work its way into the system and as the velocity increases, deflation will subside and inflationary pressures will materialize. This could easily spiral out of control and lead to hyperinflation during 2011-2012, as no matter how confidently Ben Bernanke speaks of his abilities, once the money is created and flows into the economy it multiplies via fractional reserve banking and becomes very difficult to soak back up. So while I view widespread inflation as inevitable, I don't think it will happen in 2010.

2. Stock Market Rangebound

I believe the plunge protection team will continue to support the stock market during 2010, although the growth will slow considerably. As stocks are mainly a cash market, the deflationary impact felt in the credit markets will have little impact on stocks. The market is due for a correction and there may be short volatile swings as investors lose confidence, but I think the market will end the year little changed (+/- 5%). The market is on life support, with a fat IV injection of liquidity via the government and Fed. Absent this meddling, the market would currently be much lower and I would be predicting new lows for 2010.

3. Fed Funds Rate to Remain Near Zero

While many are anticipating a rise in rates during 2010, I believe the Fed will be forced to keep rates low due to deflationary pressures. Any rate increase would wreak havoc on the markets and this is the Fed's biggest fear. At most, a small increase could occur towards the end of 2010. Higher rates are certainly on the horizon, but I think we need to see much higher inflation before the Fed changes course.

4. Real Estate Prices Flat to Lower

Real estate prices are likely to flat-line or decline during 2010. As real estate is heavily reliant on the rapidly-contracting credit market, deflation will trump any inflationary pressures created from the expansion in base money. There is an over-supply of housing and the high rate of foreclosures is likely to continue or increase during 2010. I believe real estate will be an excellent buy at some point in the next 5-10 years, but it is nowhere near a bottom yet.

5. Unemployment Remains High

Officially-reported unemployment (U-3) will hang around 10% for most of 2010, but could rise to as high as 12% nationwide. Of course, true unemployment that counts marginally employed and discouraged workers is closer to 20% currently. Government will be the major source of any new jobs, as private enterprise and small businesses continue to struggle. Of course, any wealth or jobs the government claims to create is really just a wealth transfer and not true or sustainable growth.

6. U.S. Dollar Rallies, but Drops to New Lows by Year End

With rates likely to remain near zero, I anticipate more dollar weakness during 2010. The Fed doubled the supply of base money during the past year, deficits are at record levels and Asian countries have already begun diversifying out of dollars. There have also been reports suggesting Arab countries, China, Russia, Japan and France want to end oil dealings in dollars. If the dollar begins to lose its status as world reserve currency, look out below! The current bounce could continue a bit longer before the plunge, but by the end of the year the dollar index will be at or below 70.

7. Gold and Silver to Make New Nominal Highs

While some are claiming gold has peaked, I believe gold is nowhere near a top and will reach a new nominal high between $1,300-$1,500 during 2010. Silver will outperform gold reaching $24 or higher as the gold/silver ratio dips towards 55. Remember, gold can perform well during periods of inflation or deflation. While I believe deflation is the greater threat during 2010, this will occur primarily in credit-based markets such as real estate. Cash-based markets such as precious metals are likely to experience inflation as record amounts of new money have been printed during the past year. Look for more central bank purchases during 2010, as well as significant purchases from China and other countries that are eager to diversify away from dollars. The gold/silver suppression story will continue to gain steam and with more and more investors demanding delivery, pressure will increase on shorts and COMEX regulators. There will be some type of rule change or restructuring at minimum and the potential for default is possible. Lastly, the Dow/Gold ratio will decline after bouncing in 2009.

8. Energy Prices to Push Higher

With the strengthening economy, increasing demand from China and India, plus declining supplies, I expect energy prices to move much higher during 2010. Oil will trade most of the year in the $75-$100 range, but will break above $100 for some time. I think natural gas will generate even greater returns than crude oil as it bounces off oversold lows. In addition, I expect clean energy companies to rebound during the 1st half of 2010 and think lithium and rare earth miners will benefit from this trend.

9. Agriculture Prices to Rise Sharply

One thing that is certainly not in over-supply is agriculture. With a very poor harvest season, lack of water in key agricultural areas and exploding demand from a growing middle class in China and India, I believe prices for many food items will shoot dramatically higher in 2010 and subsequent years. Investing in quality fertilizer companies should prove very profitable over the next few years.

10. More Bank Failures, Political Tension, Voter Discontent

I anticipate more banks will fail during 2010, allowing the largest banks to scoop up smaller competitors at bargain prices. Tensions will increase in the Middle East and between the U.S. and China/Russia. A major attack will be attempted on U.S. soil, the electorate will turn against corporatist politicians of both parties and a third political party will begin to emerge. Faith in the political system will continue to wane causing a growing movement towards restructuring society under a better system. People will become less apathetic as government meddling and banker exploitation will finally begin to hit everyone in the pocketbook. Look for more frugality, local buying, community organization and a move towards becoming self-sustaining.

While many are fearful of the political and economic climate at the moment, I remain optimistic that the current crisis is a necessary cleansing of the system and will allow for the rebuilding of a better society. The transition will undoubtedly be difficult as jobs become scarce, prices rise and crime and civil unrest flourish. However, there are common sense steps that you can take to protect yourself and your family. Besides diversifying out of dollars, moving your money out of banks and owning precious metals directly, you should also consider becoming more self-sufficient, learning to garden, stockpiling food and supplies which might become scarce, continually educating yourself and encouraging others to stop supporting a failed ponzi-based system. As it collapses under the weight of its own hubris and corruption, there will be enormous opportunities to profit individually and collectively as a society. The better prepared we all are to weather the storm and facilitate the transition, the better our future promises to be.

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