Gold is a fasten-your-seatbelts haven when there is economic instability.
In this scenario when we are gamely trying to pick interest rates outcomes, it's probably best to keep it simple, and remind ourselves that surely this is going to be a hell of a bumpy ride.
After analysing recessions from 1973 to 2020, Schroders back in January 2023 concluded:
Gold tends to do well in absolute and relative terms during US recessions; gold equities have done even better.
Looking at the returns from six months prior to the start of [each] recession to six months after the end of the recession, we can see that gold has returned 28% on average and outperformed the S&P 500 by 37%.
Gold equities have beaten this and generated returns of 61% on average, outperforming the S&P 500 by 69%. (Given the variation in the length of the recessions studied, six months before and after was chosen as the most optimal timeframe).
Every cycle is different and clearly the US economic cycle is far from the only factor influencing the gold market. One observation we would make is that when the policy responses to US have been particularly loose / accommodative, the gold price performance has been most explosive. This was the case in 1973 (when Arthur Burns was Federal Reserve governor) and was also the case in 2008 and 2020.
Reserve banks and governments can become overwhelmed by a range of situations that could be contained if occurring separately. However, when they are combined, they present conflicting pressures. We are likely to see certain pressures becoming deflation-driven and others inflationary IMO.
Features of this policy makers dilemma include (but are not limited to) - nose-bleed high levels of government debt held by governments (and therefore needing high interest rates to attract capital and bond purchases); - supply line challenges such as that from the Red Sea; - US unable to placate muslim nations or contain the fallout and anger over the Gaza situation, and the perceived complicity of the US with Netanyahu's policies and colossal civilian loss of life (around 30k?), leading to the possibility of OPEC and BRIC nations splitting off from USD into other forms of trading not involving the USD.
- loans for US commercial properties falling due this year about $929 billion (this is massive it's like a debt cliff) see https://fortune.com/2024/02/13/commercial-real-estate-downturn/. (fortune dot com) noting the dimensions of this are difficult to fully appreciate since the economics of commercial property have altered so fundamentally.
- banking crises from run on the banks similar to the most recent ones, like Silicon Valley Bank which was turbo-charged by social media. There has been some rationalisation of regional banks which have higher exposure the commercial properties, but realistically many mainstream banks will have this exposure as well and it is colossal and unprecedented (see the first point) - consumer confidence until now doing ok, but starting to tick downwards, then rapidly falling, with knock on effects and reduced spending - unemployment ticking upwards leading to inability to service personal debts, as debt cliff is on the horizon and people are using credit cards as a temporary measure - repossession of cars and other high value items, due to unpaid loans - housing bubble and price pressures so intense they are leading to an inability of some cities to house workers in the provision of essential services .....generalised social dislocation - uncertain outcome of US elections.
China is sabre-rattling, struggling to put down domestic unrest since the unwritten compact unravels. This is between the populace allowing the PRC to govern, even oppressively, as the necessary price for economic development. They have so much instability from the housing bubble which has not been allowed to unwind. They're still propping it up, with ever decreasing efficacy.
Ukraine/Russia war requiring servicing. Russian interference in US elections. Anything else?
That's before even talking about the transition away from carbon-emissions and climate change, and the scramble to secure critical minerals.
So to keep it simple, I think I agree with Schroeders on this one.
Gold producer equities remain at cheap levels on a long-term view and investors are still extremely under-positioned.
Among other commentators I'm also watching Steve Hanke professor of applied economics at the Johns Hopkins University. I don't agree with absolutely everything he says but one thing he's nailed is the disregarding by policy makers of changes to the money supply. He says the current conditions of the shrinking of the money supply are similar to the onset of 1929-1930. He also says a recession by the end of this year although he got his timing on this wrong before, largely it seems because of unprecedented government decisions.
He would invest in gold, lithium and probably vanadium. Interesting because I'd identified the first two earlier.
Regardless of the precise order in which these slowly building pressures erupt, and how government and central banks respond, gold equities seem a sensible and undervalued choice, and BRG a low-risk option.
BRG. What's not to like?
BGD Price at posting:
28.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
