With gold having recently broken through the $2,000 barrier to set new highs, there was a wave of commentary about where gold might go from here. While there’s been some short-term profit-taking, many bullish analysts are getting excited about the prospect of gold at $2,500 or even $3,000.
But while those price points may still be many months away, there’s no denying that a worsening economy will continue to affect the price of gold. With the US economy showing signs of real weakness now that the full effects of the COVID lockdowns are being felt, the recession will likely continue to get worse. That should result in greater investor demand for gold and a higher gold price. Here are the four main ways the crashing economy will affect the price of gold.
1. Collapsing Debt Bubble
The corporate debt bubble in the US has grown to an incredible size. Total corporate debt is more than 50% greater than it was during the Great Recession, with over $10 trillion in debt outstanding. Not only is the size of that debt larger, but the quality of the debt issued has been decreasing too. More and more debt issued today is BBB-rated, barely above junk status. And many large corporations, such as Ford and Kraft Heinz, have already been downgraded to junk ratings.
With economic activity slowing, corporations are going to find it more and more difficult to continue servicing all of this debt. The risk of default will increase, as will the odds of some of these firms having to declare bankruptcy. That won’t be good for the economy, and that will renew fears that we’re in a systemic crisis similar to or likely worse than 2008.
2. Falling Stock Market
Recently gold and stock markets have been moving relatively in tandem, with both stock markets and gold rising and falling in unison. While gold has a reputation for performing well when stock markets are weak, and vice versa, it’s not unusual to see the two moving side by side. It will be interesting to see how long this coupling continues, as eventually the trends for stock markets and gold will diverge.
It’s helpful to keep in mind what happened in 2008, as gold saw great gains early in the year, began to slide in the fall as stock markets panicked, then picked back up. From the stock market peak in October 2007 to the trough in 2009, stock market indexes lost over 50% of their value, while gold gained over 25%. And gold more than tripled from its 2008 lows before it reached its previous all-time high in 2011.
The takeaway here is, once stock markets begin to slide, gold should really begin to perform well. So if you’re looking to protect your retirement assets by moving out of stocks into a gold IRA, now may be the time to do so, to lock in stock gains and take advantage of momentary dips in the gold price before a big breakout.
3. Rising Unemployment
Over 50 million Americans lost their jobs at some point over the past few months, and it’s highly likely that many of them will remain unemployed. Between the thousands of businesses expected to go under and the millions who will be permanently unemployed, that will put a huge damper on economic activity.
With many of these people likely to be out of jobs for months or even years, we’re looking at a potential repeat of the post-2008 era and its jobless recovery. And given the sheer size of the unemployment problem, which dwarfs every crisis since the Great Depression, it’s very likely that unemployment could weigh on the economy for years to come.
Many Wall Street analysts expect the next decade to be a weak one for the economy. They were already expecting that before COVID, and now with the results of lockdowns being seen, and the likelihood of future lockdowns increasing, that’s only adding fuel to the fire.
4. Devalued Dollar
The Federal Reserve increased the size of its balance sheet by over $3 trillion this year, and had pledged up to $5.5 trillion in assistance to overnight funding markets at one point. While the Fed is doing everything it can to slow the move of this money to financial markets, there’s no denying that creating money on this scale will devalue the dollar and decrease its purchasing power. And the weaker the dollar gets, the stronger gold becomes.
The federal government is already planning on nearly $4 trillion in deficit spending this fiscal year, with more possibly to come. All of that will have to be funded with new issuance of debt, and right now the Fed is the only game in town willing to purchase that debt.
Monetization of government debt issuance is never a good thing, and is normally indicative of a banana republic. It’s a sign that the government has run out of options, is trying to throw money at problems to fix them, and is probably going to rely on even more deficit financing in the future.
With the Fed being complicit in this deficit spending, there is really no check on Congress’ ability to spend, at least up to a point. At some point markets will rebel, US Treasury debt will trade at a discount, and the dollar’s devaluation will be so great that countries around the world seek to stop using it.
We could be reaching the tipping point soon, the point at which the government decides to go full speed ahead with dollar devaluation, no matter the consequences. The result for consumers will be decreased purchasing power and a declining standard of living. But for those who have invested in gold, they should benefit from gold’s eventual rise in price as the dollar continues to weaken.
Gold Is Cheap Insurance
Many investors think of gold as insurance for their assets. Investing in gold provides portfolio diversification, allows for long-term price gains, and hedges against financial uncertainty and economic turmoil.
With the US economy in recession and likely to weaken before it gets better, can you afford not to invest in gold today? If we’re headed for another 2008-like recession, and if gold performs today as it did from 2008 onward, investors who take advantage of the gold bull market today should be able to look back in the coming years thankful and appreciative of how gold protected their wealth.