Steve St. Angelo
Fri, 10/02/2020 – 06:31
The stock market may dominate the headlines these days, but it is not the only important part of the economy to track. Debt has been rising on a number of fronts across the nation. The influence of this debt should be considered when assessing the overall financial landscape.
I’ve mentioned before how the federal debt and yearly federal deficits have recently grown very large by historical standards. Of particular note, the 2020 federal fiscal year is ending with what could be a record-setting pace of debt growth.
A few weeks ago, the Congressional Budget Office projected the federal deficit to hit a record $3.3 trillion this year. This, combined with low interest rates, could wane confidence in the dollar and dollar-based assets. The federal debt may grow even larger with new stimulus bills on the horizon, adding to the spending pushed forward by the previous stimulus measures.
People seeking refuge from these problems in the private market may face a different debt-related issue.
Corporations have been feasting on money they borrow from federal programs and selling bonds to deal with a shifting economy. A slowdown in consumer spending has affected a number of various-sized businesses, leading to closures of several notable chains and companies.
Yet, it seems that many portfolio holders are becoming risk averse and less willing to buy corporate debt while companies are more willing to take on debt.
In tandem with the stock market falling on September 21, the biggest exchange-traded fund focused on junk bonds, the iShares iBoxx $ High Yield Corporate Bond ETF, was hit by nearly $1.06 billion of outflows. According to MarketWatch, this was the largest single-day outflow since the start of the crisis.
While an en masse move from junk bonds might seem to only be of concern to people dealing in junk bonds, this move could indicate general movement away from bonds.
Default risk isn’t limited to junk bonds. As debts grow across a number of business fronts and more companies experience bankruptcies, default risk can grow throughout the financial landscape.
With such a huge rise in debt, it is important to own assets that can help protect portfolios from defaults, diminishing dollar power, and other risks. Owning physical precious metals, such as gold, could provide a hedge against potential default risk. Properly insulating your family’s wealth could be as easy as adding a precious metals hedge.
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Kitco News
(Kitco News) – The gold market is struggling to find momentum after hitting an all-time high in August and according to one financial analyst, gold prices have room to push modestly higher in the near-term and into year end.
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Kitco News
(Kitco News) – Gold is not too expensive and it is not too late to get in, the Ray Dalio-led hedge fund Bridgewater Associates LP said in its September report.
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Ted Butler
Thu, 10/01/2020 – 08:25
Clive Maund
Thu, 10/01/2020 – 08:13
It’s official. According to the National Bureau of Economic Research, the U.S. is in the midst of an economic recession. With gold prices hitting new milestones, some people wonder whether this is normal—is this how gold is supposed to perform during a recession? What might we expect in the coming months?
Learn about the current recession and what we can learn from gold’s past performance during recessionary times.
In June, the National Bureau of Economic Research declared that the U.S. had entered a recession, which the Bureau defines as a “broad contraction of the economy.” This contraction includes declines in employment and manufacturing. The Bureau determined that the current U.S. recession began in February.
No one knows when the recession will end. However, many economists predict it could conclude in late 2020 or early 2021.
The Great Recession, which lasted from December 2007 to June 2009, hit the U.S. because of factors such as the subprime mortgage crisis, a dramatic cutback in bank-to-bank lending, and a stock market crash. In 2001, the dot.com recession resulted from tech stocks’ overinflation, the 9/11 terrorist attacks, and several accounting scandals. The Gulf War recession, which stretched from July 1990 to March 1991, was triggered by increases in interest rates that slowed the economy.
This time around, a public health crisis prompted the current recession—perhaps the worst economic calamity since the Great Depression. (By the way, what’s the difference between a recession and depression? Simply put, a depression is a more dramatic version of a recession.)
Bottom line: All recessions are not created equal. Any number of events could trigger a recession.
During a recession, a time of great economic uncertainty, many people flock to gold as a “safe haven” versus, say, stocks or currency. Because gold is a tangible asset with a track record of independent performance, the yellow metal often is seen as a smart method for preserving wealth when the economy is shaky.
As such, it’s safe to say that a rally in the price of gold is not unusual during a recession. (Silver, too, has historically seen price spikes during recessions.)
In the middle of the Great Recession (March 2008), for instance, gold soared past the $1,000/oz. mark for a couple of days before settling in the $900/oz. range. And during the dot.com recession of 2001, the price of gold saw a generally upward trajectory.
This year, the price of gold also has enjoyed a lift amid recessionary conditions. In fact, gold broke a record in August, surpassing $2,000/oz. It climbed to a record high of $2,072.49/oz.
“Gold is the clear beneficiary of safe-haven demand,” Stephen Innes, chief global market strategist at AxiTrader, said in a July 2020 research note cited by CNN Business.
Some market watchers forecast gold could keep posting solid gains as a result of low U.S. interest rates, a weakened U.S. dollar, fears of inflation, and lingering trade tensions between the U.S. and China. Michael Cuggino, CEO of the Permanent Portfolio Family of Funds, believes it would “not be unreasonable” for gold to fly past $4,000/oz.
Results of a mid-September survey by Kitco News show that half of the Wall Street professionals who participated are bullish on gold. At the same time, 43% are essentially neutral, and just one analyst thinks gold prices would go down.
Analysts at Canadian bank CIBC forecast that gold prices could average $2,300/oz. in 2021.
“The outlook for continued low real interest rates, increasing government debt burdens coupled with geopolitical uncertainty arising from the upcoming U.S. election are all supportive of further significant price appreciation,” the analysts said in a report cited by Kitco News.
At U.S. Money Reserve, we’re always watching gold prices to better understand the gold market and serve our clients. You can watch and learn, too. Bookmark our Gold Price Chart and call U.S. Money Reserve when you’re ready to add gold to your portfolio.
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