Precious Metals Offer Protection Against Looming Economic Challenges

USA Today reported the US economy’s performance in Q1 was the worst in three years. 

GDP growth in the last quarter of Biden’s administration was 2.4%; in the first quarter of Trump’s administration, it is – 0.3%.

Wednesday’s Commerce Department report showed that US consumer spending rose 0.7% in March, a solid gain but consumers might of been stocking up before Trump’s tariffs took effect.

The personal consumption expenditures (PCE) price index (A measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services and the Fed’s preferred inflation gauge) rose 2.3% from a year earlier, a lower annual inflation rate than in recent months but the March inflation data comes from a time before most of Trump’s tariffs took effect.

US and global stock markets went into a tizzy and still are — though since the 90-day hiatus was announced and trade deals are supposedly under negotiation they have recovered somewhat. The bond market too sold off dramatically after Trump’s announced high tariffs on imported goods on April 2.

Oil prices have collapsed because demand has cratered.

The macro situation? The US economy might be shrinking despite a blip from businesses and consumers stocking up before tariffs took effect. The US economy appears to have at least temporarily stalled.

China is canceling orders of key agricultural exports. It earlier this month halted a shipment of 12,000 tons of pork, the largest order since the pandemic in 2020. In the week ending April 17, China dropped its soybean orders to just 1,800 tons, down more than 97% from 72,800 tons bought the week before. China has switched to Brazil as its main soybean supplier.

US farmers growing everything from soy, cotton, pork, grains and hay are reeling.

The New York Post reports the US agricultural industry into a “full-blown crisis” as canceled orders from China are forcing farmers to lay off workers or shut down their businesses, according to a trade group.

Renowned economist Stephen Roach believes that we are heading for a ‘Stagflation for the Ages’, writing in Project Syndicate that The supply-chain disruptions during the pandemic look almost quaint compared to the fundamental reordering of global trade currently underway. This fracturing, when coupled with US President Donald Trump’s attacks on central-bank independence and preference for a weaker dollar, threatens a prolonged period of stagflation.

The US decoupling from global trade networks, especially from China-centric and US/Canada/Mexico-centric supply chains, will reverse supply-chain efficiencies that reduced inflation by at least half a percentage point a year over the past decade. The reversal is likely to be permanent.

Also, the reshoring of manufacturing to the US will not be seamless, nor accomplished in the short time with projects taking years to plan and construct. Finding workers for mostly low paying jobs seems to be an issue.

An AI overview tells us; In February 2024, there were approximately 482,000 unfilled manufacturing jobs in the US. While this is down from the 513,000 job openings in January, it’s still a significant number. Some studies project that as many as 1.9 to 2.1 million manufacturing jobs could remain unfilled by 2030 if current trends continue. 

Stagflation and gold

Frank Holmes believes investors think gold is a classic fear trade that retail investors are still sorely underexposed to.

Your author believes they should be scared, economic signs point to a coming bout of stagflation.

A stagflationary environment is one where economic growth is decelerating and inflation remains high.

Is the US on a road leading to possible stagflation and recession? An official recession being called could be just 2 months away. Tariffs are thought to be, by most, inflationary. Decelerating growth should mean more job losses on top of Federal job loss programs underway. The US, and perhaps large parts of the global economy are on the road to stagflation.

Add in the tense geo-politics at play globally from Syria to North Korea, to Taiwan, to Iran, to Israel to the Ukraine and realize that’s as gold friendly as much as Basal III.

Echoes of History Navigating Today’s Global Challenges

What are good investments in a stagflationary environment. The answer is Gold and Silver.

Gold and stagflation 

Gold does well in stagflationary periods and outperforms equities during recessions.

The chart below by Sunshine Profits shows the gold price climbing during the stagflationary 1970s, surging from $100 per ounce in 1976 to around $650 in 1980, when CPI inflation topped out at 14%.

Gold prices in yellow compared to inflation in red.
Source: Sunshine Profits

In fact, gold outperforms other asset classes during times of economic stagnation and higher prices. The table below shows that, of the four business cycle phases since 1973, stagflation is the most supportive of gold, and the worst for stocks, whose investors get squeezed by rising costs and falling revenues. Gold returned 32.2% during stagflation compared to 9.6% for US Treasury bonds and -11.6% for equities.

A 2023 Forbes article asks ‘How Does Gold Perform With Inflation, Stagflation And Recession’?

How’s this for performance? In six of the last eight recessions, gold outperformed the S&P 500 by 37% on average.

During the last major bout of inflation, 1973-79, inflation averaged about 8.8% a year, while gold rocked a 35% annual return. The article notes that elevated oil prices were the primary drivers of inflation and stagflation in the 1970s.

The 2021 inflation was different from the 1970s. It was caused by government spending, supply chain disruptions and rates held too low for too long, according to Forbes. Sound familiar to what’s happening today?

When inflation started rising in March 2021 gold was trading around $1,700/oz. Over subsequent months, both gold and inflation headed higher, with the CPI topping out at 9% in July 2022 and gold reaching $2,050 in March 2022.

Forbes notes Stagflation creates economic uncertainty because it challenges the traditional relationship between inflation and unemployment. Historically, gold benefits in economic uncertainty.

Conclusion

Bad economic and geo-political news leads to precious metals being an attractive alternative to stocks.

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