Gold Will Come Out Stronger from the Economic Hurricane
The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieroń
Recession calls are getting louder; an economic hurricane is coming.
Credit default swaps have nearly doubled in 2022, surpassing pre-pandemic levels. The higher their prices, the greater the chance of default. The high-yield bond market shows that worries about the economy are rising. The spread between so-called junk bonds and Treasuries surged from about 300 to more than 500 basis points in 2022.
It means that the risk premium has risen considerably this year. The implication is clear: Market sentiment is deteriorating and confidence in the economy’s strength is declining. Widening credit spreads are usually a good harbinger for gold.
Not only have investors become more worried recently. US consumer sentiment dived below 60, to a level not seen since the Great Recession and, earlier, the recession of 1980.
Sieroń discusses booms and busts, slowing credit expansion, rising interest rates and projects that become unviable. When the bubble bursts, a recession unfolds, which is happening in North America right now.
What does it mean for gold? Well, the bust is coming, if not already here. This might be surprising as, typically, business cycles are longer, but the 2020 monetary impulse was an unusually large, one-time event. This is good news for gold, which shines during financial crises. Indeed, in the recessionary year of 2008, gold gained 4%, and it rallied even more impressively in 2009 and subsequent years. So far, we are still in 2007, when the stock market had already entered recessionary territory but the real economy hadn’t yet fallen into recession. However, this will change in upcoming months. If history is any guide, gold will emerge stronger from the crisis.