Goldex Heartbeats: When political risk meets recession risk

Goldex Team

Editorial content

The similar pattern of the last few months continues unabated once again. Political risk moved higher, recession risk moved higher and economic data moved lower, in some cases to some shocking lows.

Political risk keeps rising

The non-violent means of law, order, media opinion, public opinion is being tested in ways not seen for decades. Who would have thought a few years ago this could have ever been an official statement from the US President?

This, of course, was the latest, and harshest reaction to the newly instituted impeachment investigation into Donald Trump. Many dismiss such rhetoric as atypical, but this belies the fact that there remains a huge swell of support for this President, many of whom agree with him. The use of the words “coup”, “betrayal” and the pitch that the elite refuse to let the people have what they desire is now common across the developed world. The jump from rhetoric to real perception is a small one. And one that is being made now. The battle lines are drawn. And it is really starting to turn ugly.

Brexit also looks uglier and uglier. The scenes in Parliament of shouting and screaming were the most shocking in decades. A constitutional crisis looms with no clear resolution in sight. Make no mistake, this is far beyond Brexit now. The consensual politics of the last three decades is over. Both domestically and internationally. And with this amount of anger at near all-time highs in markets, and near full employment, the consequences of recession to political chaos remain worrying.

Economic risk keeps rising too

The economic data did nothing to lift the spirits:

Germany is in contraction. Business expectations, below, are cratering too:

The eurozone is in contraction. Meanwhile, China Industrial Profits for August came in at -2.0% vs the previous of +2.6% which is another bad miss. South Korea looks like it will now go into deflation, for the first time ever.

Over in the US, the ISM Manufacturing survey below 50 is deeply troubling but as DB point out: “ISM at 47.8 is bad but new export orders at 41 is even worse. There is no end in sight to this slowdown, the recession risk is real.”

Everywhere, dire data keeps coming.

When political risk meets recession risk

With full employment in the US and markets near all-time highs what happens now? Looming elections mean that those in power know that the interventionist levers need to be pulled and pulled now.

Trump targets ‘pathetic’ Federal Reserve after worst manufacturing reading in a decade

As the US President demands lower rates from the supposed independent central bank, in Europe the narrative is changing towards fiscal intervention:

ECB’s Draghi calls for euro zone stimulus to boost investment

It is now clear that the Germans must spend, and thus abandon their long cherished balanced budget rules. At least that is the way the story is beginning to develop. Previously unthinkable, it is not “if” but “when, and how”:

Why Germany must not make the same fiscal mistakes as the US

Where does this leave gold?

The non-interventionist, free-market orthodoxy has been in decline for some time but as the global economy rolls over expect to see a cacophony of infrastructure spending and other fiscal stimulus, as well as ever increasing monetary stimulus from central banks. The horse has bolted, so is there any point in shutting the barn door now? The conventional wisdom says no. The prevailing attitude is now that if there is a recession, it’s because there was not enough stimulus and not because of the intervention itself.

The big loser from the US impeachment proceedings is actually Joe Biden. Elizabeth Warren now looks like the one to beat for the Democrats. Her policies will take the power of the state into the economy to new levels in the United States.

Where does this leave investors? Currencies will continue to be trashed with low rates and negative rates. Deficits will grow ever larger as Modern Monetary Theory, Universal Basic Income and more borrowing, at lower rates, become more and more acceptable.

The only store of value then of course to turn to is gold. One that is immune to political machinations and economic malfeasance. Gold continues to be driven by shorter term investment activity based on technical levels at the moment, with prices now in a downward trend. However, price action in the last few days will certainly be taken advantage of by more than a few structural buyers and there remain economic and political issues – all laid out above – that could quickly change its direction. Fundamentally not much has changed, so gold is settling into a firm range throughout October for now.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.