By John McDonald
In January 2020, the U.S. entered its 127th month of consecutive economic expansion.
This is a record made more impressive by the fact that for the first time since the Declaration of Independence was signed in 1776, the United States completed a full calendar decade without a single day of economic recession.
That is an impressive trend, and it has investors feeling a little concerned for 2020. Here’s why:
Conventional wisdom states that all good things must end.
Conventional wisdom also states that most economic cycles do not last this long.
As a result, investors are feeling a little “antsy” about this expansion even though the overall results are still extremely positive.
And when investors feel “antsy,” you know what happens. They invest in safe-haven assets like gold and other physical assets.
So, how can gold investors gauge whether gold has room to go higher when it has already started out the year at an extremely positive value of nearly $1,580.00?
Well, the answer lies in tracking three key economic risk factors for 2020.
If these risks remain relevant and immediate despite the economic expansion, then your gold investment is likely to continue to rally.
1. Technological Advances
Technology is not usually considered a risk factor, but it does tend to feel like “the great unknown” to most investors.
Bloomberg contributor Jim Bianco speculates in a recent op-ed piece that one reason the economic expansion has not yet ended is that technology keeps advancing faster than the U.S. economy is growing.
He links this advancement to the prevention of inflation, hyper-competitive pricing, and world peace, such as it is.
However, since tech remains something that is often difficult to understand or predict, this risk factor in the economy remains a mystery for most investors.
As long as we are relying on tech to sustain economic growth, we will likely see gold rally or at least hold steady.
Note: Bianco’s notion that technology creates an environment wherein the world is more likely to abstain from armed conflict is valid, but that could be coming to an end.
In any war event, however, gold investors tend to come out ahead. If the U.S. finds itself in an armed conflict, gold will likely rise even higher.
2. Central Banks
According to the latest World Bank data, central bank balance sheets in developed countries are growing at a much faster rate than the underlying economies in those banks’ countries.
Prior to 2006, the reverse was true. The trend shift is indicative of the overarching effects of long-term money-printing policies.
If central banks pull back on these policies, such as the U.S. Federal Reserve hinted it would in late 2018, the economy will immediately be at risk as investors panic and attempt to exit the financial markets.
In fact, all the Fed had to do in early 2019 was imply it might increase interest rates sometime in the next 12 months and the S&P 500 Index fell nearly 20 percent!
Not surprisingly, the Fed reversed course in 2019 and implied it would not increase rates.
By the end of 2019, the Fed had cut rates three times. Fed officials said in October that three interest rate cuts were “sufficient” and some even broke ranks to say that they thought more cuts in the near term were a bad idea “unless the economy slowed significantly”.
For investors watching risk factors, this means that there could be another sentiment-based reversal in the financial markets if 2020 yields neither astronomic growth nor additional rate cuts.
In that case, expect gold’s rally to remain strong.
3. Oil Prices
Interestingly, the economy has remained stable despite fluctuating oil prices over the past 127 months.
This is likely due to U.S. supplies keeping investor confidence high.
In fact, in November 2019, U.S. was a net petroleum exporter for the first time in 70 years.
The U.S. economy has historically fluctuated with the price of oil if barrel values remained strong or weak for an extended period.
With oil prices steady, the economy is somewhat insulated from this risk factor.
However, as 2020 progresses, if investors become concerned about the price of oil then the economy might dive downward while gold prices continue to rise.
Risk Indicators Imply All Systems “Go” for Gold
With additional national uncertainty growing out of an unconventional impeachment process (never before has the House refused to send the articles of impeachment to the Senate for a trial) and worries over conflict in the Middle East, the gold market seems set for a longer rally than most analysts predicted in Q4 2019.
Palladium breached the $2,000 marker by the end of the winter holidays, and most analysts agree gold could follow suit.
“Geopolitics is taking center stage,” explained Benjamin Lu, an analyst at Phillip Futures. “Iran-U.S. tensions have escalated to a boiling point.”
Lu predicted that gold could hit the “key psychological level of $1,600” in the event that it breaks through the $1,585-per-ounce “resistance level” this quarter.Sources: Bloomberg, Reuters, Washington Post