One of the most influential investors on Wall St is recommending that “gold is a good place to park your cash” as the economic landscape continues to lurch toward a potential recession.
The investor in question is Raoul Pal, founder of Global Macro Investor. He holds the distinction of having correctly called the 2008 crash of the financial system. Pal sees a rising likelihood of another shock to the global economy in the near future, which makes holding one’s wealth in gold a safe strategy amid widespread uncertainty.
It’s not enough to simply trust that Mr. Pal says investors should consider “hiding” under the safety umbrella of gold ahead of the next recession. Many noteworthy pundits have made this same assertion earlier this year, from Jeffrey Gundlanch to Bill Gross to Stanley Druckenmiller. What’s more important are the insights that Pal brings to his argument in favor of gold.
In a general sense, there are troubling signs coming from the European banking sector. Some of Europe’s biggest banks, particularly in Spain and Italy, are not faring well due to unresolved bad loans and significant capital flight. Pal thinks that the myriad issues weighing on Germany’s Deutsche Bank are an early sign of what’s to come for the continent’s banking sector as a whole—partly because these institutions are so closely tied to one another.
At a higher level in the banking hierarchy, central banks’ foray into negative interest rates is having its own unwanted effects. Beyond making it harder for banks to make a profit, the use of negative interest-rate policies (NIRP) hasn’t boosted equities like many had expected. For example, the stock markets in Japan and Switzerland are posting worse than 10% losses year-to-date despite negative rates being implemented by the central banks of these respective countries.
Moreover, Pal explains that central banks like the Federal Reserve are reactive rather than proactive because changes in interest-rate policy track behind the performance of the economy, not the other way around. This is why the Fed is always waiting for signs of stronger economic growth before it raises rates. Consequently, it’s a losing bet to rely on the action of central banks to lift markets.
One key indicator according to Pal is the London Interbank Offered Rate, commonly known as Libor. This key lending rate between banks generally moves higher the more that financial institutions are worried about liquidity drying up and a market downturn. So far over the last year, Libor has risen almost threefold from 0.31% to 0.88%.
Ignoring the Signs
A constant feature of the mainstream news media is the positive spin that is usually applied to coverage of how the economy is performing. This is especially true in an election year.
“It’s in no one’s interest ahead of the election to say the U.S. economy is a mess,” Pal points out. However, an ongoing slowdown in global trade reveals that the chances of a coming recession are higher than most people (or the media) appreciate.
A related historical precedent that Pal cites is the fact that a recession has followed every two-term presidential administration since 1910 within 12 months of the new president taking office.
As a result of these indicators, Pal believes that gold prices could double when the next expected recession hits. Aside from his bold prediction, the conviction that gold will serve an investor well in case the economy falls into recession still stands.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.