On Monday morning, gold futures for December delivery climbed above $1,650, while silver futures closed in on $32. Gold and silver still remain in a trading range while markets wait on a European debt solution. Although many investors are focused on the Eurozone, we are in the midst of an earnings season. Investors should use this earnings season to sneak a peek at what companies are predicting for the global economy. One of the most telling earnings releases comes from Dow and S&P 500 component, Caterpillar.
Caterpillar is a worldwide leader in heavy construction and mining equipment. The company receives 60% of its revenue from international sales. Before the opening bell, Caterpillar reported third quarter earnings. The results were impressive. Resource industries sales, which includes mining equipment, more than doubled to $4.6 billion as high precious metal prices in the third-quarter gave demand a boost. CEO Doug Oberhelman said, “This was the best quarter for sales in our history, and our order backlog is at an all-time high.” Near the end of the company’s earnings release are some very interesting projections.
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While Caterpillar recognizes the effects of the Eurozone government debt problems, US difficulties in raising the federal debt limit, and signs of slowing economic growth, the company does not believe these concerns will signal a recession. Despite the recent decline in metal prices, production continues to increase, and mining companies appear to be continuing with investments. This shows confidence from miners that metal prices will remain high enough to produce profits. Caterpillar states, “ While commodity prices are off their highs, we expect that they will remain favorable for mining investment and production.” In 2012, the company projects that an expanding global economy will likely increase demand for most commodities, and producers will struggle to meet this growing demand. Commodity prices are expected to average higher than in 2011.
Interest rates are an important factor to consider for gold and silver. Record low interest rates drive gold and silver prices higher because savers and bond investors are punished through negative real interest rates. By the time inflation is factored in, the real return in bonds and saving accounts are pathetic. Investors looking for a store of wealth often find that gold and silver offer a better solution than bonds or saving accounts. Several developed countries have reduced policy tightening and lowered interest rates. Ben Bernanke is well known for committing to record low interest rates in the US until at least 2013. Caterpillar does not believe Bernanke will end at record low interest rates though. The company states, “We expect additional actions to maintain liquidity growth.” Bernanke has already announced Operation Twist, but could more quantitative easing be on the way? Caterpillar also predicts that the Bank of Japan will continue to hold interest rates near zero, and Latin American economies will likely reduce interest rates. Caterpillar expects that the ECB will reverse their recent interest rate increases as early as this quarter, and as late as the end of the first quarter 2012. Overall, Caterpillar expects interest rates to trend lower for 2012, which will be very bullish for precious metals.
As our Premium Gold & Silver Newsletter subscribers know, we expect more QE from central banks that are already at record low interest rates. Ongoing low interest rates and more quantitative easing will provide strong support for gold and silver prices. Furthermore, growth in Asia/Pacific economies will also support commodity prices. Caterpillar expects Asia/Pacific growth of about 7%, while China grows 9%. Growth in other large regional economies, India and Indonesia, should also improve slightly. Caterpillar describes the economies of the US, Eurozone, and Japan as ones with the most significant risks to the company’s outlook. The company explains, “Our forecast of improved growth in these economies rests on the assumption that central banks will continue recent efforts to provide more liquidity, allowing modest recoveries to continue. Should they prematurely tighten these policies, recession could develop.”