Recession Is Good For Gold, But A Crisis Would Be Even Better
Sunshine Profits | Aug 04, 2022 11:40AM ET
The U.S. economy fell into a technical recession. As a safe-haven asset, will gold soar now?h2 What Is Recession, Anyway?/h2
Ladies and gentlemen, please welcome the technical GDP dropped 0.9% in the second quarter, following a 1.6% decline in the first quarter (annualized quarterly rates). As the chart below shows, on a quarter-on-quarter basis, real GDP decreased by 0.4% and 0.2%, respectively. Thus, the U.S. economy recorded two quarters of negative growth, which implies a technical recession.
However, are we really in a recession?
The Fed and the White House deny it. For example, President Joe Biden said last week:
“We’re not going to be in a recession, in my view.”
Similarly, Treasury Secretary Janet Yellen said the U.S. economy is not in a recession, instead it’s “in a period of transition in which growth is slowing.”
Yeah, sure! But what else could the officials say?
There is a grain of truth in their statements. After all, with a very low inflation would be only transitory.
Sure, a true recession is defined by the NBER, which determines when the U.S. economy is in such a state as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In this light, we are not yet in a total recession, as the scale of the decrease has been too small – so far. However, this can change when the impact of high inflation and the Fed’s monetary policy operates with a lag, so the worst is yet to come.
This is also what is suggested by the yield curve . The spread between 10-year and 2-year Treasury bonds (red line) has already fallen deeply into negative territory, while the spread between 10-year and 3-month Treasuries (blue line) will probably do it soon, as the chart below shows.
However, who actually cares – except the politicians – about the labels?
The economy may be in a recession or not, but one thing is clear: the state of the economy is not good and it’s getting weaker. Just look at the Atlanta Fed’s projection of GDP in the third quarter. According to the GDPNow model estimate from Aug. 1, the real GDP growth (seasonally adjusted annual rate) in the Q3 of 2022 will be 1.3%, down from the 2.1% projected on July 29. It doesn’t bode well, does it?
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The same scenario was in late 2007, when economic data was already looking bad, but the pundits disagreed with statements that the U.S. was headed into a recession. People always try to deny their problems – until they become undeniable some time later.
h2 Implications For Gold/h2What does it all mean for the gold market?
Well, gold – as a safe-haven asset – usually thrives during recessions. In recent weeks, the yellow metal rebounded from about $1,700 to about $1,760, as the chart below shows.
One reason for this upward move was a more China and Taiwan, but gold could also start to smell recession.
To be clear, it’s too early to declare a new rally . In my view, the last FOMC meeting reduced the odds of a large decline, but the sell-off at the beginning of a crisis phase is still very likely, as it was in 2008 and in 2020.
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