As we can see, each time the CPI cancellation rate has peaked above 5%, it has been accompanied or followed by a recession. The last such case dates back to 2008 during the global financial crisis, but the same thing happened in 1990, 1980, 1974 and 1970. This does not bode well for the years to come.
Some analysts claim that we are not currently experiencing a normal economic cycle. From this point of view, recovery from a pandemic crisis is quite similar to post-war demobilization, so that high inflation does not necessarily imply an overheating of the economy and could subsidize itself without an immediate recession. . Of course, supply shortages and pent-up demand have contributed to the current inflationary episode, but the role of the money supply should not be forgotten. Given its surge, the Fed must tighten its monetary policy to curb inflation. However, this is exactly what can trigger a recession, given high leverage and Wall Street’s reliance on cheap cash.
What does this mean for the gold market? Good, the possibility of the Fed’s tightening cycle leading to a recession is good news for the yellow metal, that shines brightest during economic crises. In fact, gold’s recent resistance to higher bond yields may be explained by the demand for gold as a hedge against the error or the Fed’s inability to stage a soft landing.
Another bullish implication is that the Fed will need to ease its stance at some point when interest rate hikes lead to economic slowdown or equity market turbulence. If history teaches us anything, it’s that the Fed always deflates and ends less falcon that he promised. In other words, the US central bank cares a lot more about Wall Street than it is willing to admit and probably a lot more than it cares about inflation.
That said, the recession will not start the day after rates take off. Economic indicators do not signal an economic slump. The yield curve has flattened, but is comfortably above negative territory. I know the pandemic has condensed the last recession and the economic rebound, but I don’t expect that anytime soon (at least not in 2022). That implies that gold will have to live this year without the support of the recession or strong anticipations of it.
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Arkadiusz Sieron, PhD
Sunshine Profits: Efficient investment through diligence and care.