While 2022 may have been a relatively disappointing year for gold so far, the outlook for the yellow metal remains bright. With recession on the horizon and many more people warning of an economic slowdown, the stage is being set for a resurgence in the gold price over the coming year.
According to delegates meeting at the London Bullion Market Association (LBMA), the gold price is expected to rise to over $1,800 by this time next year. If you’ve followed gold at all over the past several years, you might remember that sometimes even bullish forecasts like this underestimate gold’s performance.
We caught a glimpse of that in 2020, when gold set new record highs as a result of the sharp and severe worldwide recession. That far surpassed expectations. And if the next recession is as severe as some seem to think it could be, we could see gold once again climbing.
One encouraging sign is the growing disconnect between gold prices in London and those in China, with Chinese prices trading at a premium to London’s. That’s a sign of increased demand for gold that bodes well for gold’s future too.
Why Gold Price Could Increase
The US economy is largely driven by consumer demand, with consumer spending being responsible for about two-thirds of the economy. So anything that impacts consumer spending has an impact on the economy.
Right now US consumers are starting to suffer in two ways. On the one hand, they’re growing weary of spending, and as a result inventories are starting to pile up at many retailers. With stimulus checks having long since been spent, households no longer have the funds to be able to make big purchases.
But on the other hand, those who are still buying are increasingly having to resort to taking on debt even to be able to afford food, housing, and energy. Americans are piling up credit card debt at ever higher rates. And installment lenders are growing in popularity as inflation has made Americans’ standard of living ever more expensive.
Speaking of inflation, the Federal Reserve’s monetary tightening thus far has failed to tame it. There are three possible reasons for that.
First, the Fed is late to the party. Just like it was late to acknowledge that inflation was a problem, it has been late in starting its policies to combat inflation.
Second, the Fed hasn’t tightened to the fullest extent it can. While its reduction of Treasury securities has been pretty close to the maximum it stated, its reduction of agency mortgage-backed securities has been less than $10 billion. So total balance sheet reduction has been far less than it could have been. With a total reduction of about 2%, there’s just no way that balance sheet reduction has had a major impact on monetary conditions yet.
Third, the Fed’s interest rate hikes haven’t been sufficient to bring down inflation. With inflation still at over 8% and a federal funds rate of only 3-3.25%, the real (inflation-adjusted) federal funds rate is still deeply negative. When Paul Volcker fought inflation in the early 1980s, he had to push the federal funds rate to well above the inflation rate.
Interest rates pushed close to 20%, while inflation peaked at over 14%. Most observers today believe the federal funds rate should be at least 9-10%, if not higher. And the longer the Fed delays hiking the federal funds rate to a high enough level to subdue inflation, the longer inflation could remain problematic.
Gold as a Safe Haven Asset
It’s in inflationary (or even stagflationary) times like these that gold tends to shine. During the stagflation of the 1970s, for instance, gold saw annualized gains of over 30% over the course of the decade. Even adjusted for inflation, the real gains were over 20% annualized.
If inflation becomes entrenched, which some seem to think it could, then more and more people are going to have to try to protect and defend their finances against that inflation. And that could provide gold with the impetus it needs to start growing again like the 1970s.
We’re living in uncertain times right now, with the potential for both high inflation and severe recession to occur at the same time. It’s an unprecedented occurrence for most Americans, and one that could punish those who continue to act as though we’re still living in the era of low inflation and economic stability.
Imagine what would happen to your savings if we entered another financial crisis like 2008, a time when markets lost over 50% of their value, at the same time as inflation remained high or even climbed into double digits like it did during the 1970s and ‘80s. As it is, the average American’s 401(k) has lost over 25% so far this year, and nearly 30% when adjusted for inflation, and we haven’t even entered a recession.
If things have gotten this bad even before the recession, how much worse are they going to get once we’re in a recession?
This is where gold can play a role in helping protect your savings and investments, and it’s why gold has become an increasingly popular option for those looking to defend themselves against future gyrations in markets. With a gold IRA, more and more Americans are helping to protect their hard-earned retirement savings.
A gold IRA is just like any other IRA except that it holds physical gold coins or bars. It gives you the opportunity to own physical gold while still enjoying all the same tax advantages as any other tax-advantaged retirement account. And because you can roll over or transfer assets from an existing 401(k), 403(b), TSP, IRA or similar account into a gold IRA tax-free, a gold IRA allows you to place your existing retirement savings into gold and avoid any potential loss that might result from plummeting markets.
If you’ve been wondering how you can protect your retirement savings against a coming recession, maybe it’s time to start thinking about a gold IRA. Call the experts at Goldco today to learn more about how a gold IRA can help you.