Gold is a fascinating asset. It’s almost as if the worse things seem, the stronger the case gets for its upside. Gold’s in the middle of a strong bull rally and is up almost 5% year-to-date and over 18% since November 3, 2022.
We can talk about geopolitics and nuclear war risks as a reason why. However, the economic environment is arguably an even bigger catalyst threatening our day-to-day lives while building a stronger case for gold.
Recently, some statements from world leaders and CEOs coming out of The World Economic Forum’s (WEF) annual meeting in Davos, Switzerland, painted a concerning picture of the global economy. If global elites are concerned about the economy, imagine how everyday folks feel with inflation crushing their purchasing power.
Naturally, when the WEF meets, it brings together business leaders, international political leaders, economists, and other experts to discuss pressing global issues and priorities for the year ahead. Global economics, climate change, sustainability, inequality, geopolitics, and trade are usual talking points.
Some of the statements that came out of Davos this year confirmed our worst fears about the economy and our livelihoods.
However, from the perspective of a gold investor, the worse things sound, the more enticing the upside.
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The Overall Theme From Davos: Cost Pressures and Uncertainty
This year's World Economic Forum saw many business leaders zeroing in on risks like reigning in stubbornly high inflation, debt, threats to the labor market, and over-aggressive monetary tightening.
Businesses are "under enormous cost pressure. They need to find ways to do the same things cheaper," said Alex Karp, CEO of Palantir Technologies.
HP CEO Enrique Lores said, "it's hard to know what is going to happen," and lamented significant challenges like “ the impact of inflation, the impact of the war, the increase of energy prices, the situation in China,” as potential drivers for a recession.
On the economic forecast, Williams-Sonoma CEO Laura Alber added, "honestly, it's a lot of uncertainty.”
Much of that uncertainty comes from aggressive monetary policies across the globe that could become overly aggressive and hike interest rates until inflation slows.
At Davos, Christine Lagarde, President of the European Central Bank, said so herself. "We shall stay the course until such a time when we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner."
Unfortunately for Lagarde, the E.U. is in a much worse economic situation than the U.S. However, count JPMorgan Chase CEO Jamie Dimon as a concerned party who believes American interest rates could blow past current projections.
Why? A lot of "underlying inflation, which won’t go away so quickly.”
Furthermore, even though U.S. inflation increased 6.5% in December 2022, its smallest increase since October 2021, Dimon warned it’s only temporary because of a pullback in oil prices and recent slowdowns in China.
Even though the Fed is using whatever tool it can to rein in inflation, it's losing the battle and might only win once we're in an actual recession.
The Economy’s Gloomy Reality
Other prominent economic figures at Davos painted a grimmer economic picture for 2023.
For one, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said that the U.S., E.U., and China are simultaneously slowing. She added that one-third of the world economy would be in a recession in 2023, with emerging markets disproportionately affected.
World Bank President David Malpass echoed this sentiment and said that even if the U.S. heads for a soft landing, the world could encounter a ‘long-lasting slowdown’ that lasts at least two years.
However, what does this matter to the everyday American who’s not an elite participant at Davos? The economic reality in the U.S. is a lot worse than what WEF talking heads say.
The fact that we should supposedly cheer about a 6.5% inflation rate as slowing is nonsense. The reality is prices are still skyrocketing. We are now at the point where people are paying double, sometimes triple, for eggs.
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Moreover, according to the latest National Association of Business Economics (NABE) survey, more than half of U.S. business leaders say the U.S. economy is already in a recession or will see one in the next year.
Labor numbers still look decent, which the Fed is using to justify the continuation of its rate hikes. But look no further than recent layoffs as evidence that things could improve, to say the least.
2022 ended with tech companies like Amazon, Meta, Twitter, Stripe, and Lyft announcing hiring freezes or mass layoffs. Soon the contagion spread to Wall Street, with Goldman Sachs laying off 4,000 workers.
2023 started with the same mass layoff trends, as Google’s parent company, Alphabet, cut 12,000 jobs.
Worse, Microsoft simultaneously laid off 10,000 workers and announced plans to invest billions of dollars in OpenAI, the developer of disruptive A.I. language tool ChatGPT. That alone should speak volumes about the future of the economy and labor market.
The Key Takeaway- A Bull Case For Gold
Whether it's a recession, inflation, or some combination leading to “stagflation,” uncertain economic environments are often the best times to invest in gold.
During recessions, many investors rush into gold because it is a tangible asset with a 5000-year track record of retaining its value. Gold is considered a safe haven and a strong portfolio diversifier as it keeps its value and sometimes appreciates during market fluctuations and poor economic conditions- unlike stocks and bonds.
History is our best teacher. Consider how during six of the past eight recessions since 1970, gold outperformed the S&P 500.
- January 11, 1973-October 3, 1974: S&P 500 -48.2%, Gold 139.4%
- September 21, 1976-March 6, 1978: S&P 500 -19.4%, Gold 53.8%
- August 25, 1987-December 4, 1987 S&P 500 33.5%, Gold 6.2%
- July 16, 1990-October 11, 1990: S&P 500 -19.9%, Gold 6.8%
- March 27, 2000-October 9, 2002 S&P 500 -49.0% Gold 12.4%
- October 9, 2007-March 9, 2009 S&P 500 -56.8% Gold 25.5%
Moreover, during inflation, the value of paper money decreases, while the value of gold can increase. Gold is a finite resource with a limited supply. You cannot increase the gold supply by printing more of it.
Furthermore, as purchasing power decreases, gold’s quality as a store of value can preserve and protect it. The fact that gold has no direct connection to any fiat currency or economy makes it an ideal hedge against inflation and currency devaluation.
With gold recently breaching $1940 an ounce, the catalysts continue mounting for further upside.
Pay attention as things shake out because the upside could be significant. As Goldman Sachs says, commodities are in store for a 'bullish concoction' and ‘superior total returns’ in 2023, with gold, in particular, likely on a cusp of sustained upside.