What are the risks ahead for financial and precious metals markets?
“As the euphoria surrounding the global re-opening fades over the course of the second half of the year, various risks are likely to gain increased attention in financial and precious metals markets. Some risks like inflation have been front and center on investor minds for much of the
first half of this year, but other risks including a resurgence of the coronavirus, growing tensions between the United States and China, and overextended equity markets have been on the backburners. They are likely to come to the forefront as the year progresses. All of these
factors are potentially disruptive to economic growth and likely to be positive for gold and silver.
Even without these risks causing any serious damage to global economic growth, growth should be expected to slow during the second half of 2021 and beyond compared to the supercharged pace observed during the first half of this year.
The global economy should be expected to grow at a healthy pace in the coming quarter, with various risks stated above acting as headwinds to growth but none strong enough to necessarily create recessionary conditions.
This scenario could keep real rates in negative territory for the foreseeable future. Real U.S. Treasury bill rates have been negative since around 2008, roughly 13 years. The Fed has suggested they may remain negative for at least another decade. This extended environment is positive for gold, other precious metals, and commodities in general, and it is far from over. An estimated $16.5 trillion dollars of negative yield bonds – in nominal terms – meanwhile are estimated to be outstanding by July. That compares to 1.4 billion ounces of gold worth $2.5 trillion at $1,800 per ounce. Thirteen years after the Global Financial Crisis, the extent to which global financial markets have radically changed from the way they worked prior to 2008 should be clear to every market participant and observer (even if it is not).
The risks stated above will deter the Fed and other major central banks from tightening policy. And while CPM Group has persistently held that hyperinflationary conditions will not occur, inflation is expected to be stronger than that observed in the period between the Great Reces-
sion and the pandemic. Negative real rates are a positive for precious metals prices. So, too, are negative nominal rates in major countries.
Variants of the coronavirus are a threat to the global economy. While a shutdown similar to that seen during March and April 2020 should not be expected this time around, more targeted shutdowns are beginning to emerge while even more can be expected. The negative fallout from such focused shutdowns will be less intense than the one observed last year, but nonetheless will slow economic growth and could once again hurt the travel industry.
The equity markets have been on a tear since their sharp decline in the first half of 2020. A combination of strong fiscal and monetary stimuli coupled with a reopening of the global economy are all factors that have helped push equity values higher. While equity markets are not expected to crash or enter bear market territory, a correction at some point in the near future should not be surprising. This, too, could benefit gold and silver as portfolio diver-
U.S. – China Tensions
The relation between the two largest economies in the world remains tense and is likely to continue deteriorating in future. Worse than that, tensions between China on the one hand and Europe, Japan, and other countries compound the likelihood of reduced international cooperation and coordination of economic and financial responses to present and future negative developments. There is less drama and outward hostility between the two countries at
this time compared with the recent past, but the relationship is problematic and both governments have signaled increased intransigence. This could have negative ramifications for the global economy, given the size of these two countries. As an example, the escalation of trade tensions between the two countries back in 2019 resulted in hampering global economic growth in that year.”