There is a saying in the gold market that when the economy looks like it is headed for a dive, gold begins to climb the wall of worry. What does this mean? Well, a less-than-rosy economic outlook can lead to financial markets parking some of their money into the gold markets to avoid losses elsewhere, as we have illustrated in the following chart over the last two downturns.
I have charted gold price with a secondary indicator of world GDP, to reflect the reaction gold has when the world approaches an economic downturn. The left side depicts the Great Recession in 2008 and the subsequent fall in world GDP. Gold began a long 2.5-year rise that saw it move from the 750 range all the way up to a new all-time high of $1900.
That makes sense – downturns lead to pessimism about economic prospects and sell-offs in paper markets like bonds and stocks. Which in turn leads to increased investment in gold, long considered a safe haven asset in times of economic stress.
The right part of the chart depicts the shutdowns in 2020 due to the virus. A much sharper decline in GDP followed as stores and businesses were either shut down completely or operated on a reduced basis. Though the recovery came quickly as world leaders began to loosen lockdown procedures, the damage had already been done to GDP numbers.
Gold, already having begun its cyclical upturn in 2019, responded with a fast and furious rise to $2069.40. Gold enthusiasts were understandably excited and responded with great expectations for the next couple of years. While gold has done well since 2016 overall, we have not seen a sustained rise in gold in some time.
I believe that is because this time, the economic pullback in 2020 was engineered and not for the purpose of cleaning out bad investments in the economy. It served another purpose, for world health.
In 2022, we experienced a big deflation cycle. Most asset classes lost money, including major stock indices, bonds, cryptocurrencies, and real estate. However, gold and silver were slightly better than even for the year. Why didn’t the gold price accelerate in 2022 the way it had done from 2009-2011 and again in 2020-2021? Let’s talk about that next.
This Time is a Bit Different
The selloff in asset classes in 2022 was not directly the result of a deflated economy and lagging GDP. The world reported a positive GDP last year, per this chart from the OECD.
In addition, the OECD expects a positive GDP print for 2023, though they expect global GDP to decline by over $2 trillion. This is what I believe will rekindle the gold price and once again put it on an upwards trajectory. Once GDP starts to decline, the market begins to show interest in gold. So, if the OECD is correct, then we should expect a higher gold price to end 2023 than what we started with.
This time is a bit different also in that many analysts are calling for a formal recession in 2023, and economic fundamentals aren’t particularly rosy in many instances. I still have skepticism that we see the big push this year. A lot of it really depends on how the economies react to more central banks tightening balance sheets and raising interest rates.
It is the snapback from those policies which will tell us how economies will fare. If we see a true recession in 2023 as expected, then we can toss the OECD projects for positive GDP for the year in the trashcan. I suspect that their prediction of positive GDP for 2023 is based upon rosy projected GDP numbers from the major government accounting offices. But when have they ever been right?
Final Thoughts
It appears 2023 will be a bit of a transition year for gold, at least until we have a quarter or two of economic data to see how it affects the growth and stability of the world financial markets. If recession finally and officially rises, and the expected decline in GDP for the year shades worse than the OCED expects, I think it is quite possible we get that pop in gold that many have been waiting on for the last couple of years.
Think of it this way – short-term panics cause gold to climb the wall of worry. The 2008 Great Recession reflected issues in one area of the system – the debt markets and repo market liquidity (related). But the government eased and printed and staved off a larger crash. In 2022 we had a broad market liquidation on supply chain issues largely brought about from a) aging and stretched infrastructure and b) a relatively quick snap back from post-pandemic shutdowns.
What we expect to begin in 2023 is a longer-term structural issue with debt markets, excessive money printing, a collapsing Western infrastructure, and a shift back to deglobalization which should have many unintended consequences along the way. Just the potential for higher angst among market participants should bid gold up a fair amount and keep it above $1800. And in early 2023 trading, that is exactly what is happening as traders decide where to place their bets.
However, when the recession bell is finally rung, I expect a massive rush into precious metals to begin and possibly last for a few years. That all depends on if the central banks can keep pumping steroids into the market and whether companies can keep from going into debt-fueled bankruptcies. Given likely strong headwinds in economic fundamentals, I doubt the central banks can stave off the eventual collapse of the existing debt system for much longer. Nobody really could given how things sit now.
2023 could be the year that the 20-year-long gold bull market starts its next big run-up which could last several years and make bullion owners very happy. And it all boils down to what it always does – it’s the economy stupid!
