Caterpillar Outlook: Hidden Signal for Higher Gold and Silver Prices?

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After a strong performance over the past several weeks, gold and silver are currently taking a pause to refresh. Given their rapid rise and trading history, this is nothing uncommon for the precious metals. Furthermore, renewed global slowdown fears are weighing on asset prices across the board. The world’s leading manufacturer of construction and mining equipment recently downgraded its guidance, but the company’s general outlook was far more important to gold and silver.

Caterpillar, which has been driving change and progress on every continent for more than 85 years, cut its 2015 earnings forecast, citing a sluggish economy. During an analyst meeting and presentation at MINExpo International inside the Las Vegas Convention Center, Caterpillar CEO Doug Oberhelman announced that the company now expects to earn $12 to $18 per share, compared to a previous forecast of $15 to $20 per share. He explains, “There are a number of geopolitical and economic factors driving uncertainty in the world today, but our base case scenario calls for modest global economic growth over the next few years.”

The company’s earnings reduction coincides with lowered outlooks from other major economic bellwethers such as FedEx and Norfolk Southern. However, while many analysts were focused on the earnings cut, the presentation reveals another catalyst for higher precious metal prices, more monetary easing. Caterpillar notes that a recession is still possible for the world economy, but says modest growth is most likely. This may seem far-fetch given the current state of affairs in the world, but Caterpillar is also factoring in that central banks around the world will continue to debase currencies in efforts to spur growth.

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The Federal Reserve recently announced an unlimited quantitative easing program, which will buy $40 billion of mortgage backed securities each month, for as long as it believes is necessary. Meanwhile, the European Central Bank announced in early September that policy makers agreed to an unlimited bond purchasing program of their own. Bank of Japan also decided to expand its program by 10 trillion yen. Even with all the recent central bank actions, Caterpillar believes more is on the way. During the analyst meeting, the company states, “Accommodative central bank policy is in place around the world, and we expect more to come.” Additionally, “China has already made policy changes to help growth and we expect more, with the impact being seen in late 2012 or early 2013.”

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In September, China approved an estimated $156 billion infrastructure project involving new subways, highways and other improvements. The move signals that like other banks and governments around the globe, it is also open to more stimulus measures. China is the world’s largest gold producer and second largest gold consumer. The nation injecting more stimulus to avert a hard landing is bullish for gold and silver.

Drilling into a Caterpillar presentation for insights on monetary policy may seem a bit unusual, but their previous predictions have been right on the money and more accurate than some economists. In October 2011, the company announced it expected to see “additional actions to maintain liquidity growth” and for the ECB to reverse their recent interest rate increases. Shortly thereafter, the Fed extended its low interest pledge to at least mid-2014, launched emergency swap lines and pushed Operation Twist to the end of this year. Furthermore, the ECB created two liquidity programs known as Long-Term Refinancing Operations and slashed its benchmark interest rate to a record low.

In July 2012, Caterpillar provided an updated outlook on the Federal Reserve, saying “The U.S. Federal Reserve’s balance sheet expansion in the first half of 2010 benefited the economy, but those gains seem to be slowing.  Banks are expanding credit at a moderate rate, but money growth is slowing.” It added that going forward it expected the central bank to “resume expanding its balance sheet” and for the ECB to provide “additional actions this year.” As we now know, the Federal Reserve has launched QE-to-infinity-and-beyond and extended its zero interest rate policy out to at least mid-2015. In fact, the Fed’s balance sheet is now well on its way to a whopping $5 trillion. Meanwhile, the ECB continues to take steps towards their own money printing methods.

With fiat currencies on a collision course with central banking policies, investors looking to preserve wealth and achieve true portfolio diversification should strongly consider hard assets such as gold and silver sooner, rather than later.

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Disclosure: Long EXK, AG, HL, PHYS

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