Gold And Silver Prices Drop Then Rebound As Recession Fears Increase

Key Concepts

• Precious Metals Market Volatility: Gold, silver, platinum, and palladium are experiencing significant price fluctuations and consolidation.
• Economic Risk and Financial System Instability: Similarities to the 2004-2008 period are noted, with concerns about insurance companies' investments in private credit, adjustable-rate mortgages, cryptocurrency for illicit activities, and an AI bubble.
• Deteriorating Economic Data: Producer Price Index (PPI) shows rising goods prices due to tariffs, consumer confidence is sharply down, consumer spending is weakening, and manufacturing indices are declining.
• Shifting Global Economic Gravity: The world is moving forward without the US, with a growing consensus on global economic and financial strategies that exclude the US.
• US Trade Policy Impact: Tariffs and trade wars are increasing goods prices in the US and contributing to a global pivot away from US economic dominance.
• Comparison to the Late 1970s: While some similarities exist, key differences in the economic, political, and financial environments are highlighted, particularly regarding debt levels and market sophistication.
• Recession and Precious Metals Relationship: The historical relationship between recessions and precious metals prices is complex and not always consistent, with recent trends suggesting prices may rise through a recession.
• CPM Group's Outlook: Expectation of a recession within 12-24 months, with precious metals prices likely rising through this period.

Market Overview

Precious Metals Performance:

• Gold: Currently trading around $4,135 for the December contract, which becomes deliverable at the end of the week. Prices are up approximately $48.80, having traded between $4,160 and $4,152. Upward pressure is expected leading into December delivery, with potential for further rises in the first quarter of the year due to ongoing economic and political issues.
• Silver: Up about 47 cents at $50.79, with intraday trading between $50.32 and $51.51. The market is characterized by sharp vacillation and consolidation. While short-term downside potential exists, longer-term price increases are anticipated. The speaker refutes claims of a physical shortage, attributing price drivers primarily to investment demand.
• Platinum: Up around $4 at $1,556, consolidating in the $1,500-$1,650 range. Expectations are for prices to follow gold and silver, remaining relatively strong into January, potentially softening thereafter depending on investor sentiment towards the auto industry.
• Palladium: Down $11, consolidating and holding above $1,300, currently around $1,400. Prices may decline in mid-to-late December.

Economic and Financial System Risks

Similarities to 2004-2008:

• Insurance Company Investments: The IMF has warned about insurance companies investing heavily in private credit, which is difficult to value and prone to mispricing due to bilateral valuation between creditors and borrowers. This mirrors issues seen in the 2004-2008 period, which originated in the housing market with subprime mortgages and collateralized mortgage obligations. A notable case involved an insurance company's trading arm holding significant toxic assets, requiring a federal bailout.
• Increased Reliance on Adjustable-Rate Mortgages (ARMs): This was a contributing factor to the Great Recession and Global Financial Crisis. Consumers are currently facing higher expenses, lower incomes, and increased credit balances, potentially leading them to take on greater risk with ARMs without fully understanding the associated risks.

Emerging Risks:

• Cryptocurrency for Criminal Activity: A significant report highlights the increased use of cryptocurrencies for money laundering and criminal activities, posing a risk to the financial stability of credit and equities.
• AI Bubble: The AI bubble continues to grow, but it is likely based on flawed long-term economic expectations.

Deteriorating Economic Data

• Producer Price Index (PPI): The PPI released today indicates higher goods prices, attributed to tariff-related issues. The final demand for goods saw a sharp fall in early 2017 but has been rising since. The year-over-year price change for goods increased from 2% in August to over 3% in September. Services prices have remained low, falling in August and being flat in September, reflecting a weaker economy, layoffs, and reduced work.
• Consumer Confidence: Consumer confidence data has fallen sharply this month compared to last month, indicating growing consumer concern.
• Consumer Spending: Consumer spending is down. While it was up approximately 3% in September, this was largely due to a 2% increase in prices, resulting in a real increase of only 0.1%. Consumers are pulling back due to economic worries.
• Richmond Fed Manufacturing Index: This index declined by 15% for the month.

The overall economic picture is characterized by "a lot of bad data, a lot of problems hanging over the market," resembling the conditions of 2006-2007.

Shifting Global Economic Landscape

• G20 Meeting: The G20 met in South Africa (not Brazil as initially stated), representing three-quarters of the world's population, two-thirds of global GDP, and three-quarters of world trade. The US did not attend, and other global leaders expressed relief at its absence, indicating a growing consensus on global economic, political, financial, and monetary strategies that exclude the US.
• US Isolation: The US government is increasingly isolating itself from the world.
• Shift in Global Economic Gravity: The president of Finland noted the shift in the center of global economic gravity away from the US.
• China's Trade Performance: Chinese exports to the US fell by 27% in September but saw a slight recovery in October. However, Chinese exports to the rest of the world were up 8.7% in September, and excluding the US, this increase was even larger. China is benefiting from the US trade war, as are other countries. Imports into China from the rest of the world are also rising sharply.
• Impact of US Policies: The Trump administration's policies, including tariffs, immigration, domestic issues, foreign diplomacy, and military behavior, have provided the impetus for a long-desired global pivot away from US economic, financial, military, political, and cultural hegemony.
• Historical Context: Since the 1970s, there has been a stated desire to reduce US global influence. The US accounted for approximately 44% of global GDP in the 1970s, compared to about 22% now. The current administration is seen as an ally in allowing the world to move forward independently of the US.

Data Delays and Uncertainty

• Government Shutdown Impact: The US government shutdown has led to significant delays in the release of crucial economic data from agencies like the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), and the Census Department.
• "Flying in the Dark": The inability to access timely economic data means that policymakers and investors are operating with limited information.
• Specific Data Delays:
  • Third-quarter GDP estimates (first and second) were delayed and will not be released until December 23rd.
  • Final GDP numbers for the third quarter, originally due December 19th, are rescheduled for January.
  • Personal income, personal expenditures, and associated inflation indices, due December 19th, are yet to be scheduled. This data is critical for the Federal Reserve's upcoming meeting in December.
  • International transactions data, due December 18th, is rescheduled for January.
  • International trade in goods and services data, due next week, is also rescheduled.

This lack of data creates significant uncertainty for economic forecasting and policy decisions.

Comparison to the Late 1970s

Similarities:

• Market Volatility: Both periods exhibit volatility in precious metals and financial markets.
• Economic and Political Uncertainty: Both periods are marked by significant global economic and political challenges.

Key Differences:

• Political and Economic Environment:
  • Late 1970s: Characterized by the Soviet invasion of Afghanistan, US hostages in Iran, a quadrupling of oil prices leading to an oil crisis, 14% inflation, 21% interest rates, and a recession that began in early 1980.
  • Current: While there are economic problems, the specific geopolitical and economic crises of the late 1970s are absent.
• Financial Market Sophistication:
  • Late 1970s: Financial markets were less sophisticated. Gold and silver were primary hedging instruments against stocks, bonds, and currencies.
  • Current: Markets are far more complex with a wider range of hedging tools.
• Debt Levels:
  • Late 1970s: The US federal deficit was $58 billion, and total debt was less than a trillion dollars.
  • Current: The US has accumulated approximately $38 trillion in debt since then, representing a significant increase in fiscal irresponsibility.
• Precious Metals Performance During Recessions:
  • Late 1970s: Gold and silver prices rose into the recession and then fell sharply during the recession for two and a half years. A buy recommendation was not issued until mid-1982.
  • Current: Precious metals prices have been rising since 2019, and the expectation is that they will likely continue to rise through an anticipated recession in the next 12-24 months, potentially falling off afterward. This is more akin to the post-2001 and post-2007 recessionary periods where gold and silver prices rose for years before, during, and after the recessions, driven by factors like sovereign debt crises and credit downgrades.

Conclusion and Outlook

The current economic and financial situation presents significant risks, with parallels to the 2004-2008 period. However, the global political and economic landscape is fundamentally different from the late 1970s, particularly concerning the US's role and the level of global debt.

CPM Group anticipates a recession within the next 12 to 24 months. Their expectation is that gold and silver prices will likely rise through this recessionary period, with potential for a decline afterward depending on global economic, political, and financial conditions.

The speaker advises caution, noting that while rising precious metals prices can be beneficial for holders, a sharp increase could signal a decline in other asset classes. Investors are encouraged to make informed decisions regarding precious metals and commodities.