As financial markets across the world experience a level of volatility that is provoking concern, many people are turning their eyes to assets that may help protect their wealth during such times. Gold is a topic of much interest these days since it has traditionally been considered a safe-haven asset that often holds a stable market value in the face of downturns. In their continuing effort to make resources and information available to the public, U.S. Money Reserve, America’s Gold Authority®, has recently released a forecast on the state of gold heading into the new year. We have summarized the document below to help better inform anyone who is interested in purchasing gold during these potentially turbulent times.
Previous Year’s Turmoil
With the economy now 10 years out from the 2008 financial crisis, many economists are beginning to worry that we may be heading back into a recession. This prediction may seem unintuitive, since many economic indicators performed well in 2018. Last year saw record stock prices, increasing housing prices, a high level of consumer spending, and a rising GDP. However, a host of warning signs that could foretell a recession have also begun to accumulate, including high levels of household debt, heightened tensions around trade, historic drops in stock prices, and stagnating home sales.
In contrast to the general state of the economy, the previous year was actually quite eventful for gold prices. As the commodity is often known to perform well during times of uncertainty, many of the ups and downs of the year helped build momentum for the metal. As volatility crept into politics, finance, and trade, many on Wall Street began to seek out an increased level of risk resistance by turning to gold.
Debt and the Deficit
As the U.S. Money Reserve forecast outlines, one thing in particular that is contributing to concerns of a stagnating economy is the state of the federal deficit and the amount of debt the country has taken on in recent years. These figures, which are approaching $1 trillion for the deficit and $22 trillion in total debt, are becoming increasingly concerning to economists. In comparison, the 2008 debt level was just above $10 trillion and represented 68 percent of the GDP, while the current level of debt represents 107 percent of the GDP.
In the past, high levels of debt and deficit have severely impacted the economy at large. As these indicators increase, interest rates often follow. Higher interest rates have the tendency to curb buying, since it is costlier for businesses to borrow money. As this type of purchasing decreases, economic growth can slow and even stagnate.
Role of Fed Policy
One of the ways in which the federal government can help spur economic growth is by lowering interest rates so that borrowing money is easier and businesses and other buyers can be more active. However, the Federal Reserve, the institution in charge of setting interest rates, is often hesitant to keep rates low for too long after a recession, as it would then lose its ability to lower interest rates in case of a future recession. So in 2015, the Fed began raising interest rates from what were then near-zero levels. Since then, the rates have been increased eight times, and the federal funds rate now sits at 2.25 percent. The Fed says it plans to raise rates throughout both 2019 and 2020.
One aspect of interest rate increases that is again provoking concerns of a recession is that higher rates have an impact on many far-reaching areas of the economy. For instance, the federal funds rate has a direct impact on mortgage interest rates, home equity loans, car loans, bank loans, and even credit cards. As borrowing and repaying debt becomes more expensive, economic expansion can suffer as well. If Federal Reserve interest rate hikes continue, many are predicting that financial markets could suffer as home prices and other economic indicators become increasingly affected by reduced levels of borrowing.
Stock Markets and Commodities
Another important topic that the forecast from U.S. Money Reserve touches upon is the current state of the stock market. It outlines how 2018 was the most volatile year for stocks since the 2008 financial crisis. October saw a market collapse of record-setting proportions, which many feel was related to stumbling tech stocks such as Facebook, Amazon, Apple, Netflix, and Google. Though the market has recently been enjoying a record run-up in prices, many feel that the historically strong bull market may have ended already.
In comparison to stock markets, which largely trade on the growth and earnings of companies, commodities markets trade on the market value of goods such as oil, livestock, and precious metals. These assets trade on the premise of supply and demand, and the prices of commodities are often intricately connected to larger economic issues. Complex issues such as stock market volatility, financial shocks, levels of inflation, and geopolitical concerns can all directly affect the prices of commodities. Gold is no exception to these types of multilevel considerations when working to forecast its performance.
Deeper Look at Gold Prices
Although gold has long been considered an asset that has the potential to retain stable prices in the face of market turmoil, its price is still beholden to the many global demands for its usage. Gold Exchange Traded Funds (ETFs) are another way for individuals and larger entities to incorporate the market value of gold into their portfolios. These ETFs, which track the price of gold, have been hurt by strong stock markets and a strong dollar. However, as these trends reverse, gold ETFs may regain lost market value. This can be especially true as people look to diversify their portfolios and incorporate assets that resist the risk of a potential market collapse.
Gold prices are hitting eight-month highs in search for an alternative to stock market volatility. Gold had fallen into a slump last summer and had been held back by a soft demand but is projected to perform much better in 2019. https://t.co/3Mmfj5rtuX pic.twitter.com/R3lyd94H72
— U.S. Money Reserve (@USMoneyReserve) January 31, 2019
On that same note, more and more institutions may seek to incorporate gold into their portfolios in the near future if the economy and stock markets underperform. This can already be seen in the holdings of central banks across the globe, which carry large portfolios that require a high degree of diversification. This is partly because of the relationship between these banks and their governments and the need to protect banks against severe downturns in markets and other economic forces. If market volatility continues into 2019 and beyond, gold may become an increasingly attractive stronghold for large-scale institutions.
In the recent forecast released by U.S. Money Reserve, it is clear that the economy and financial markets are in a state of uncertainty, with experts divided on the trends that will emerge moving forward. What is certain is that recent volatility and political unease have set the stage for a potential recession should these factors continue. In times of financial downturn, gold has traditionally performed well as a safe-haven asset that can resist global market forces. For these reasons and more, many individuals and institutions are increasingly looking to the precious metal for protection against pending economic hardship. A review of the above information can be an important first step for those interested in diversification and the protection of individual wealth.
U.S. Money Reserve Overview
U.S. Money Reserve is a leading supplier of precious metals and is the only gold company headed by a former director of the U.S. Mint, Philip N. Diehl. Owing in part to Diehl’s experience at the crux of public policy and personal financial freedom, the company has built a reputation for its ability to supply customers with precious metals to meet their particular portfolio needs. With a highly trained team of account executives, the company’s reputation for quality customer service has earned it a coveted AAA rating from the Business Consumer Alliance.