Gold came under additional corrective pressure in early U.S. trading, weighed by a further easing of geopolitical tensions, along with some better than expected U.S. economic data. While the yellow metal set new lows for the week, buying interest resurfaced well ahead of last week’s low.
While North Korea may have walked back an imminent threat to Guam, I don’t believe anyone really thinks that the Korean crisis has been resolved. “Though North Korea is signaling its restraint at the moment, fiery rhetoric and further missile tests are far from over,” concludes geopolitical intelligence firm Stratfor. They seem to think North Korea may still fire a missile before or during the joint U.S.-South Korean military exercises that begin August 21.
While risk appetite may have rebounded somewhat, there is still buying interest on dips. The next bout of “fiery rhetoric” will likely push the safest of all the safe-havens back toward $1300.
Today’s better than expected retail sales print for July comes even as the Fed issued a warning about the new record highs in household debt, which exceeded the previous high set in 2008. The New York Fed noted a “persistent upward movement” in credit card delinquencies “not seen since 2009.” While consumers may have bought more stuff in July, there ability to pay-off those credit card balances is looking increasingly dubious.
An economy saddled with that much debt is going to have a hard time growing beyond the current rather tepid 2% pace. In addition, the current expansion is already quite long in the tooth.
Another recession is coming. It may not be today. It may not be tomorrow, but it is coming.
Harvard economist Kenneth Rogoff says global central banks should be preparing plans to implement negative rates in advance of that next recession
“It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time.” — Kenneth Rogoff
The Fed has been desperate to get rates higher in recent years so that they have room to cut in the future; to the point of tightening policy into economic weakness. Here too though, the magnitude of the national, household and corporate debts are seen as major obstacles to that plan. Each basis point of higher rates makes those debts more expensive to service, bringing us closer to the the next debt crisis and recession they so desperately hope to avoid.
If U.S. rates are ultimately taken negative in the U.S., as they have in other major economies, the long-term uptrend in gold is likely to be reestablished. For even Rogoff concedes that such extraordinary monetary policy hasn’t really worked.
“But these policies have now been deployed for some years – in the case of Japan, for more than two decades – and at least so far, they have not convincingly shown an ability to decisively overcome the problems posed by the zero bound.” — Kenneth Rogoff
Don’t think for a second though that the lack of efficacy will prevent central banks from throwing good dollars, yen, euros, pounds and francs after bad. In that eventuality, you are definitely going to want some gold.