LAWRIE WILLIAMS: Gold may be the best bet in a recession/depression scenario
The gold price has been having a pretty torrid time over the past week or so with falls at one time taking it back well below $1,800 spot, although it has since made a partial recovery. Not everyone in the analytical community is downbeat though, and Mike McGlone of Bloomberg Intelligence has gone on record as seeing some distinct parallels with the situation in 2000 which, if replicated, could well take the gold price back above $2,000 again this year.
McGlone points to a situation that year when gold was behaving particularly sluggishly while the dotcom stock bubble had surged ready to burst, which it did spectacularly. When it came down hard, precious metals moved into an extended bull market. The Fed interest rate raising likelihood, predicted at at least 75 basis points at the next FOMC meeting only a few weeks ago, before the June CPI inflation data came out, seemingly a completely over-the-top response (some had even considered a 50 basis point rise excessive), is likely to confirm a tip of the U.S. economy into recession. This, coupled with the Fed’s other tightening measures, may well decimate equity markets (apart probably from gold stocks), and provide gold with the safe haven price boost it needs to make a decent advance. This will probably not be an immediate rise as general market nervousness will abound, but once the markets settle down, safe haven assets like gold could benefit hugely.
The flaw in the process, of course, is that a high interest rate rise may well even strengthen the dollar further and a strong dollar tends to lead to a weaker gold price in dollar terms. But the higher rate rise also suggests that inflation is continuing at a high level which ultimately means continued degradation of the dollar’s purchasing power. The fact that the US economy would then very obviously also be in recession territory will mitigate against the stronger dollar too as time passes.
The latest reading from the Atlanta Fed's GDPNow model, which is considered the central bank's primary tool for measuring growth in real-time, indicated at the beginning of this month that real GDP has shrunk by 2.1% on a seasonally adjusted annual rate in Q2. This follows on from a negative reading for Q1 and with the official definition of a recession being two successive quarters of negative growth it looks like the U.S. is already in a technical recession. If this negative growth continues into Q3, the recessionary trend would be considered severe and would probably start to affect the dollar index adversely anyway– although much of the rest of the world looks like it is also heading for recession too – if it is not already in one.
The big global economic fear though is that the world is heading for a depression to match that of the 1930s which was only ended by global conflict. If so, gold and gold stocks may be among the few assets to perform positively under such circumstances. One hopes, of course, that the culmination of such a process may not be world war given the destructive capability of modern weaponry. Jaw, jaw is definitely preferable to war, war. Even global economic meltdown seems to be to be a preferable alternative.
11 Jul 2022 | Categories: Gold, Dollar, US, FOMC, inflation