Weekly Wrap-Up: Impact of Recession on Gold

It has been an interesting week for gold and gold stocks. After the HUI broke resistance on Friday of last week, we received our much needed confirmation by witnessing it rise 12 points (3.4%) to 365 on Tuesday. We jumped in by adding to our GDX position and picking up Jan07 call options of Yamana Gold (AUYAV.X).

HUI_9_8.pngIn the following few days, the HUI proceeded to give back all of the recent gains, returning to 347 on Thursday and sitting around 338 on Friday. Speaking of 338, it is critical that the HUI hold above this support level. It represents not only the bottom line of the ascending triangle that created our buy signal, but it is also the 50-day moving average. Holding above 338 tells us the buy signal is still in place.

How Will A Recession Impact Gold & Gold Shares?

There has been much talk about a coming recession and the downward pressure it would exert on gold stocks. The question causing fear in the minds of many gold bugs is:

If the U.S. citizen has been the global engine buying up all the Chinese goods, then doesn’t it make sense that if a recession occurs in America, it would affect all commodities including precious metals?

It is important to remember that, unlike base metals, gold is viewed as a monetary asset. So while weakening economic activity will have a negative impact on base metals demand, it will not have the same impact on gold. Gold may have some short-term downside, as base metals give a weak tug on the gold price. But this is just guilt by association and once investors distinguish between gold and base metals, gold will quickly break loose from any association with industrial metals and rally. Because gold is a monetary asset, it will have a more direct correlation to inflation rates and currency fluctuations. Therefore, the predicted U.S. recession, with a declining US dollar, will have a positive impact on gold, even if base metals prices fall.

Chris Laird from www.PrudentSquirrel.com seems to thinks so, stating:

The single greatest force on gold right now is an expectation of a collapsing US economy due to the collapsing housing bubble. That expectation is overriding every major gold bullish force now. Even war fears in the Middle East. The expectation of a coming US economic contraction is a great hand over the gold and commodities markets now.

If China were to follow the US into recession, as I expect, I foresee a very large scale drop in commodity prices as well beginning in 2007 possibly by January, but definitely by June. Now there is one major caveat to all this, the US economic decline and gold dropping. That is major war news. War news is big for commodities and gold too.

Julian D. W. Phillips from www.GoldForecaster.com has a less gloomy view, commenting that:

One has to look at the sense of proportion on the global economy as well as on that of the U.S. The impact of a recession in the States, whilst Europe is still expanding

[which is today’s reality] will not have the global impact expected, unless the sliding of confidence in global growth and global currencies follows. Consequently, even with a mild recession [and I see no more than that now provided the oil price does not hold over $85], the demand for these commodities on the world markets will remain high.

Gold is an asset that will hold steady or rise in value ‘in extremis’, as Greenspan wrote. It is the knowledge that increasingly uncertain days lie ahead that is attracting responsible investor to the gold market. These could well include national governments as well as large institutions. The sight of Central Banks slowing down their own sales of gold stands testimony to this.

The Great Mogambo Guru (Richard Daughty), whose writing style brings unique comedic value, also seems to think that Laird’s concerns are a bit overblown, opines:

The entire historical record of economic mankind shows that gold has always done very well, and very well indeed, when the economic idiocy of creating excess money and credit was unleashed. And thus I assume that gold will go up again, when measured in the currency that is being destroyed by over-issuance, only because it always has. Always.

Mogambo also sees the possibility of a short-term economic boost from the Pension Protection Act, saying:

The new federal pension bill, the so-called Pension Protection Act, is being passed and signed into law right now because the government wants more people to put more money into the stock market. Otherwise, the people already invested in the stock market will stop showing gains, and stop reporting taxable gains, and start showing actual losses, and deducting those losses on their income tax returns.

The real impetus behind this new Congressional action is the rude shock that the stock market, the bond market, the housing market and government coffers desperately need some more big money (MBM) rolling in pretty damned soon (PDS), or prices will not go up, bond prices will not go up, and tax revenues will not go up. And then the whole “investing for retirement” scam would be exposed, and the idiocy of the American system of government (which exists merely to increase spending and support more and more of the population and economy) would similarly be exposed, none of which would have happened in the first damned place if the Federal Reserve had not provided the bank financing, which created the debt, which created the money, which inflated the money supply, which worked its way into prices, which will destroy the economy, because that is what (pause for breath) inflation does.

Roger Wiegand, from Trader Tracks, sees a win-win situation for gold commenting that:

A key and critical point that we focus upon for gold and silver is we win either way. If business rallies unabated with rampant inflation, traders flock to precious metals preserving buying power. If a recession arrives or worse, we’ll see deflation coming faster, as gold and silver rally preserving value. Commercial and retail prices, dollars and bonds will take a recessionary dive in unison.

Another interesting perspective comes from Jan Allen, who blogs at The Age of Tyranny. Jan thinks that the HUI will rise, but not surpass 401. While conceding that:

gold at $610 to $640 presents the last opportunity to buy gold before it rises again to $700, $800 and even beyond, she still cautions against owning gold stocks saying:

there is danger that gold stocks having risen so greatly in value, will simply not rise with the price of gold, as those who are already invested may take their profits leaving one holding a falling investment.

bullmarket.jpgThat should provide plenty to consider, if you weren’t already on information overload. Our position at Gold Stock Bull is that a recession will have a short-term negative effect on gold, more pronounced in stocks than the metal. A crash would obviously exasperate this condition as we expect a muted impact from the soft-landing scenario. But we believe the Fed will fight tooth and nail to continue growth, and we all know Bernanke is not afraid to crank up the printing press. So while the recession potential throws a wild card into the mix and could slow the advance in precious metals temporarily, we don’t believe it has the power to break the Gold Stock Bull.

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By | 2017-03-23T14:06:43+00:00 September 8th, 2006|Gold & Silver Commentary|

About the Author:

Jason Hamlin is the founder of Gold Stock Bull and has been investing in precious metals for over 20 years. Jason spent nearly a decade in analytics for the world’s largest market research firm, before finding success investing full time. He launched Gold Stock Bull in 2005 and turned his focus from helping fortune 500 companies to helping individual investors. Jason is a student of Austrian economics and a proponent of cryptocurrencies such at bitcoin.