Gold Poised to Shine as Inflation and Recession Roil Markets

• Inflationary shocks have disrupted global markets and created imbalances. Central banks are now fighting inflation after years of asset price inflation
• Leading indicators predict an upcoming recession in the US. Rate hikes are likely to stop soon as recession hits
• Sentiment is very negative on gold currently, presenting a buying opportunity. Seasonality supports gold into year-end
• Miners have held up well despite cost pressures. Valuations are attractive relative to gold
• Gold remains undervalued compared to history. A monetary reset is likely in the coming years, with gold playing a central role

Global markets are out of balance due to inflationary shocks, setting the stage for gold to play a central role as the international monetary system is reorganized. We see imbalances across society, politics, energy and currency markets that stem from unsustainable policies of the past four decades.

Inflationary Shock Disrupting Markets

Four decades of declining inflation bred complacency among investors and policymakers. Central banks enabled constant stimulus through “quantitative easing and low-interest rates” as disinflationary forces kept consumer prices tame. These included “cheap immigrant labor” and imports from China and Russia.

However, these pillars crumble in what has been called the “end of the decades of disinflation.” The result is an environment where central banks are now fighting inflation with asset price deflation. This year has brought tremendous losses as global equities, bonds, property and other asset classes have wiped out over $60 trillion in market cap. While some dismiss paper losses, it can be argued that real economic impacts will follow, as consumers rein in spending.

If financial conditions don’t tighten on their own, the Fed will have to shock markets.

Recession Looms as Rate Hikes Set to Cease

With inflation dominating headlines, recession risks are brewing. Collapsed consumer sentiment is weaker than during the Great Financial Crisis. Overly indebted US consumers have driven resilience so far, and U.S. households don’t use their debit cards or cash anymore for grocery shopping, they’re using their credit cards. This is a dangerous trend and will lead to further consumer crises.

Leading economic indicators have fallen below levels that preceded past recessions. There are clear parallels to prior cycles where rate cutting commenced shortly after the ISM manufacturing index dipped below 50, which recently occurred again. We can expect pressure on the Fed to pivot as a recession unfolds, as rate hikes typically end with recession:

17 out of 20 rate hike cycles ended in a recession.

Compared to former Fed Chair Paul Volcker’s fight against stagflation, today’s economy is more prone to recession at much lower rates. While investors debate how hawkish the Fed will remain, there is a turning point near. September may well be the last rate hike this cycle.

Gold Ready to Shine

With gold failing to rally amid rising inflation, there is undoubtedly some investor disappointment. However, we need to have perspective, as gold has held up well against most currencies. Gold miners have maintained profitability despite cost pressures. With valuations low compared to gold, miners are good value. Seasonality supports the miners into year-end.

Looking ahead, gold should play a central role in the coming years as easy money eras end. Sooner or later the international monetary order will be reorganized, possibly over the next couple of years, and gold will play a central and major role in this reorganization of the monetary order.