How Gold Prices Could React to a Recession in 2020

Capital Economics sees mounting risks leading to a recession in less than 2 years

recession in 2020 okay for gold

In their latest report on the U.S. economic outlook, research firm Capital Economics said that we may be less than two years away from a recession. According to an article on Kitco, the firm’s analysts are among the voices warning that the Fed’s ongoing tightening cycle could have disastrous consequences for the economy.

Before the markets start winding down, the economists predict a continued uptrend in GDP growth, rounding up to a 2.9% average for the year. But, as the stimulus subsides and the cumulative hikes begin to take their toll, the article states that growth rates should reverse and slump to 2.0% in 2019 and 1.3% in 2020. By this point, the nation will have found itself immersed in a new recession.

As a response, the Fed will have to abandon their current policy and cut interest rates in yet another revival of monetary easing, said the team. Previously, other analysts have pointed to the dismal statistic regarding the Fed’s previous tightening schedules, since nearly all of them culminated in a recession.

According to the article, in such an environment of wealth erosion and general hardship, gold would once again establish its role as a peerless store of value. Capital Economics researchers see other headwinds that could expedite the U.S. economic slowdown while boosting gold, such as a potential collapse of NAFTA or the introduction of more tariffs.

The analysts were critical of the trade standoff between the U.S. and several other countries, going as far as to call it the biggest recessionary threat. In the report, Capital Economics explained how the involved countries continue to provoke one another and that retaliatory responses will eventually lead to a full stoppage of exports.

Capital Economics also dismissed the recent string of promising economic data, stating that this year’s robust growth numbers are a short-term fixture that rests on rocky foundations. The article writes that the Fed already confirmed it would raise rates a total of four times this year, an announcement that Capital Economics’ team views as overly optimistic. Steep rates will pour over into high borrowing costs just as the recent tax cuts lose steam, halting growth and undoing the Fed’s work.

Given the mounting risk, Capital Economics expects gold to finish the year on a strong note by averaging $1,300 an ounce. From there, the yellow metal is expected to proceed to have an exceptional 2019 with an average price of $1,350. As the Fed adapts to the recession by slicing rates in 2020 and beyond, Capital Economics predicts that gold will go on to reach $1,400 an ounce.