Global Systemic Risks Are Rising And Gold Will Move to The Forefront
The comments below are an edited and abridged synopsis of an article by King World News
June was difficult for most asset categories and marked a first half that was one of the worst in decades. Gold is relatively flat for the year at -1.20% YTD through June 30, 2022, while silver has declined 13% YTD. Gold mining equities are down 9.90% YTD. This compares to a YTD decline of 20.58% for the S&P 500 Index and the continuation of a historic drawdown for bond markets that have lost 9.14% YTD, as measured by the US Treasury Index.
Up for discussion: The June review—the toughest month in years; gold continues to perform as a safe haven; sticky, stubborn inflation at a 4-decade high; making things worse—QT, shallow market depth and deteriorating financial conditions; S&P 500 downward earnings revisions coming; global recession risks are rising; and systemic risks are rising.
The global financial system and the global economy are more complex than ever and are now seeing multiple exogenous rate shocks. The latest is the growing threat of a synchronized global recession, where there is no growth region to offset weakness and no ability to lean on exports to save the day. Meanwhile, central banks will likely hike rates to bring down the highest inflation in decades. The markets remain in a difficult situation: The Fed will likely increase rates if we get solid economic data and if not, the market will likely price in recession.
Systematic risks may trend higher if a global recession develops while central banks are still hiking rates. As recession moves to the forefront, the risk associated with high debt levels will become topical again and prices may begin to reflect that risk. Ultimately, the current stagflation environment combined with a 120% debt-to-GDP ratio is a potent risk generator, increasing the need for gold as a safe-haven asset. The multiple contraction phase driven by rate hikes has been dramatic, but we are far from a dovish Fed pivot and closer to the approaching risk stage driven by recession dynamics. There is a possible major re-allocation event towards safe-haven, capital preservation assets in the second half of 2022.