One key consideration for gold in the event of a coming recession is the likely policy response, which at the margin must almost prove supportive of the nominal price of the yellow metal. If we look back at the post-global financial crisis response and the US Federal Reserve’s multiple iterations of quantitative easing, it is clear that gold rallied whenever it became obvious that the Fed was set to ease policy again – most famously when Fed Chairman Ben Bernanke tipped the markets off that QE2 was on its way in August of 2010 at the Fed’s Jackson Hole symposium.
Gold rallied in the ensuing weeks to new highs above $1,265/oz and ran up to its all-time high in USD terms in late 2011. Subsequently, gold slowly began to change its behaviour as the market realised that central bank policy was not bringing the kind of inflation that gold bulls anticipated. By early 2012, the USD was turning around
, and the top in gold versus the euro was posted in late 2012 and against the yen in April of 2013, the very week that the Bank of Japan’s Kuroda launched his “big bazooka” of quantitative easing.
But that doesn’t mean gold is permanently down for the count or that policymakers can’t engineer inflation if they really want to. Consider that if the world is indeed going into a new recession now it will be doing so with record levels of debt and at low – and even in some cases – negative interest rates.
With so little policy room to work with and having demonstrated that the “old, unconventional” tools of QE
don’t work, policymakers will inevitably reach for something new. That something new is likely to include something along the lines of nominal GDP targeting and fiscal forcing of the economy, measures that could prove far more inflationary if the focus is injecting money into the economy that will be spent rather than used to inflate asset prices, which was the chief result from QE and low rates.
In this kind of fiscal forcing or debt monetisation scenario aimed at bringing down the economy’s leverage while keeping unemployment low, gold could quickly play its role as something that retains its value relative to other assets. Certainly, the risks given the likely eventual policy response look asymmetric to the upside.