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A Recession, Debt Crisis Would Be Good For Gold - VanEck

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(Kitco News) - Gold is expected to garner safe-haven interest as investors look to protect themselves against an impending recession, according to one fund manager,

In a recent report, Joe Foster, portfolio manager and strategist for the VanEck Gold and Precious Metals Strategy, warned that a growing divergence in the U.S. economy has raised the threat of a recession.

“Sentiment remains strong before a recession, while actual economic indicators are weakening, and this time the divergence has become more pronounced,” he said. “…Combined with other late-cycle indicators, stock market volatility, bond market action, and central-bank behavior all suggest a recession remains in the forecast and probably may occur sooner than many expect. If the economy tumbles into recession, we expect financial risks to escalate that drive gold higher.”

Foster said that exacerbating the threat of a recession is an impending debt crisis. Foster noted that U.S debt currently totals about 75% of gross domestic product. Increased spending is expected to push the deficit above $1 trillion by 2022.

“We believe a debt crisis is imminent, although the breaking point is difficult to forecast. It may come in the next recession, or at a time when rates spike as foreign holders of U.S. Treasuries lose confidence in Washington,” he said. “If cutting spending is impossible, growth is weak, and raising revenue by hiking taxes even higher is limited, then we see only two options for handling U.S. debt: default or monetization.”

Foster added that government spending is not expected to end anytime soon as more people embrace the idea of Modern Monetary Theory (MMT).

“Americans, regardless of political ideology, may find the lure of free money irresistible. In addition to purportedly taking care of our indebtedness, MMT can supposedly help pay for a progressive agenda of healthcare and employment for all, abandonment of fossil fuels, and free college tuition,” he said. “If adopted, MMT would likely lead to currency debasement and hyper-inflation on a scale seen in Weimar Germany almost 100 years ago.”

While Foster remains optimistic on gold, the metal has struggled to find momentum to push it above the critical psychological level at $1,300 an ounce. June gold futures last traded at $1,291.20, down 0.30% on the day.

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