Consumer confidence plunged in the wake of the terrorist attacks on the World Trade Center and the Pentagon. The University of Michigan's consumer report for mid-October showed a slight up tick in the consumer sentiment index. A variety of more frequent polls also suggest that consumer confidence is trying to stage a mild comeback. While these confidence measures do tend to provide reliable data over time, it is important not to place too much emphasis on short-term movements. After all, a small sample of individuals is responding on their "feelings" and expectations. The plethora of ominous headlines about an economic recession is enough to frighten even the least risk averse individual.

Our view is that real hardcore data can give a more reliable indication of the economic landscape. For instance, we've already mentioned that motor vehicle sales reflect underlying expectations about economic conditions. Even with the 0% financing, which is a fantastic inducement to purchase a car these days, individuals who were worried about their jobs just wouldn't make such a purchase. October auto sales won't be available for another week, but automakers are indicating that sales are going through the roof.

Another relatively reliable "hardcore" indicator is available daily. Gold prices are a good indicator of consumer sentiment, as well as an indicator of inflation and economic activity. Investors often turn to gold in times of uncertainty. The chart below compares gold prices to the Conference Board's consumer confidence index. Note the jump in gold prices in early 1990 at the time of the Persian Gulf War. At the end of the war, prices fell sharply. This segment reflects sentiment, consumer confidence. Notice that consumer confidence had fallen sharply throughout this period.

As we move forward in time through the early 1990s, gold prices begin falling because of soggy economic activity in the early stages of recovery. Prices do start to turn around in the mid-1990s when economic activity began to percolate. By 1997, gold prices were coming down because investors were becoming increasingly optimistic about the economy and the stock market - note the jump in confidence.

Gold is a global commodity and not just subject to the economic environment of the United States. The drop in gold prices also reflected the economic crisis in Southeast Asia. Gold is very important in this region of the world. By October 1999, gold prices were rising sharply on the belief that inflationary pressures were building and the Fed would soon raise interest rates. Inflationary fears dampened over the course of 2000 as the majority of price hikes were concentrated in the energy sector. Confidence began to decline as consumers realized that the stock market had probably peaked (in fact, it had peaked in March 2000, but confidence peaked two months later).

Looking at the present
The following chart depicts daily gold prices since the beginning of this year. Prices fluctuated in a relatively narrow range until May when oil prices spiked, causing a corresponding gain in gold prices. The gold price hikes in June and August also reflected momentary oil price spurts. The most recent price hike took place on September 11. Prices remained elevated for a couple of weeks then peaked on October 8 and have begun to head downward since. Given that gold prices have an established history of reflecting consumer and investor confidence - after all this reflects actual purchases of gold at these levels and is not a feeling survey - it is encouraging from the standpoint of an investor to see the decided downturn in gold prices. Keep in mind that gold has come down despite continued fears in the marketplace over anthrax.

The bottom line
Most economists have pretty much conceded that the United States is in recession as third and fourth quarter GDP figures are likely to be negative. Given the layoffs in a variety of industries, there is no question that consumer spending will be dampened in coming months. But the drop in gold prices can be encouraging news as it may mean consumer confidence won't stay in the dumps forever.

Evelina M. Tainer, Chief Economist, Econoday