Gold buyers are falling asleep at the wheel. It is late July. Beach vacations are calling. The recent upside breakout lost its momentum. Why should you be looking at gold now? The U.S. economy could be on the verge of recession next year. In that scenario, this year's gold price levels will look cheap.
Three reasons the U.S. economy is vulnerable:
- The International Monetary Fund (IMF) is worried. Just this week, the IMF issued an "urgent" call to Group of 20 largest economy nations to implement more policies to encourage economic growth. The IMF reportedly said that global central banks should keep their easy-money monetary policies and that the G-20 should develop contingency plans in case the sluggish global performance shifts into a recession.
- 2017 is the first year in the U.S. Presidential Election Cycle. No matter who wins the current nail-biter of a race for the White House, the economy and stock market will become vulnerable in 2017.
The four-year presidential cycle is well-documented. It is in the early years (usually first two years) of a new administration that wars, recessions and bear markets usually begin, says The Stock Trader's Almanac. The reasons are simple. The new president usually slides into the White House boosted by a strong mandate and support. The new president will move to enact their various programs and agendas, often which are not necessarily supportive to the economy.
Additionally, whichever candidate wins, business uncertainty will remain high, which will weigh on new business spending, investment and hiring. Businesses will hunker down and wait to see how and where the dust settles before putting into place new or aggressive expansion or building plans. Bottom line: that means less spending, less hiring.
- The current U.S. expansion is old and running on fumes. The National Bureau of Economic Research (the arbiter of when recessions start and end in the U.S.) declared that the Great Recession ended in June 2009. The U.S. economy is currently in its 85th month of "expansion" phase. And, all economists admit the current expansion is "half-speed" at best and never saw the U.S. economy charging on all cylinders. The current expansion has been fueled by aggressive Federal Reserve easing tactics. But, yet the U.S. economy never even got back to so-called "trend growth" in the 3.5% level on a sustained basis.
The average length of a U.S. expansion cycle (trough to trough) is 69.5 months, according to the NBER. That means this current "expansion" cycle is already on its last legs.
Key takeaways: When you put together the struggles in the larger global economy (Brexit uncertainty, still sluggish growth in Japan, slowing growth in China) –combined with the fact that a new U.S. president will take control of the helm in 2017 (with all the uncertainty that will bring no matter who wins) and the fact that the current expansion is old –the odds of recession appear to be climbing.
What this means for gold: According to data from The Stock Trader's Almanac, most bear markets in stocks occur in the first or second years after the presidential election. When stocks suffer, investors historically turn to gold as a safe-haven, an alternative asset and a wealth building tool. If the U.S. economy slides into recession, the Federal Reserve will be forced to resort to even more creative and off-the-books monetary policy engagement –which will be gold supportive.
Investor to-do list: Long-term gold buyers have been supporting the yellow metal all year on corrective pullbacks. Gold is a little sluggish right now –the summer doldrums are starting to kick in. Use this time to pick your next buy spot. If history continues the buying opportunity won't last long.
READ MORE: 2016 –the year Gold Dip Buyers Ruled.
By Kira Brecht, contributing to Kitco News;