Recession Draws Closer
On September 18, 2015, we wrote the following: "The stage has been set for western investors to return to gold as the only reliable asset for wealth protection. All that remains, we believe, is for investors to connect the dots.
Recession Draws Closer
On September 18, 2015, we wrote the following: "The stage has been set for western investors to return to gold as the only reliable asset for wealth protection. All that remains, we believe, is for investors to connect the dots. Debt levels are far too high to support economic expansion. Inventories are too high to support rising profits and retail sales are weak. Industrial production is falling. The global economy is slowing down. We think all the signs are in place for a recession. Financial assets are far too rich for this environment."
Central bank monetary stimulus has not worked and the economy has not met any of the Fed's projections, not even close. Fed credibility, so important to stock market performance and the fall in the gold price, has suffered significant damage. Investors are becoming increasingly risk averse. We believe that, as a result, a new bull market in gold has begun while equities have entered a new bear market.
While we were arguing that a new recession was on the way, the mainstream completely failed to see the economic weakness that was occurring. When finally they began to see evidence of a slowdown, it was only in manufacturing. We argued it was not contained, that it was economy-wide. And now we have the confirmation. Yesterday, the Markit US Services PMI collapsed into contraction at 49.8, its weakest reading since October, 2012 and massively below expectations of 53.5. Markit wrote "slumping business confidence and an increased downturn in order book backlogs suggest there's worse to come." And further: "The PMI survey data show a significant risk of the US economy falling into contraction in the first quarter."
We do not believe there will be any more Fed rate hikes. The next move will be more monetary stimulus and as Europe, Japan and the US have already proved, it won't help to boost economic growth. During a period of rising investor appetite for risk, additional stimulus does support financial asset markets. But that is not where we are now. Investors are becoming more risk averse, as we can clearly see in widening credit market spreads, growing divergences between asset classes and higher volatility. Now, we believe, further stimulus will boost the one asset that best protects wealth...gold.