Wall Street bears Gary Shilling and Tony Dwyer are counting down to a recession. Bulls on CNBC's Fast Money are looking for new stock market highs. One could argue either side of the debate. However, most would agree the economy operates in cycles, and a recession will come eventually. The question is not if, but when.
PMI, consumer confidence and employment data cause weekly and monthly noise. The stock market goes up one day, and down the next. However, the long term picture is that all expansions eventually end in recessions when the economy slows down. Since the current Fed Funds Rate is 1.5% to 1.75%, the Fed has little room to lower rates during the next recession. Fed Chairman Jay Powell has stated the Fed is prepared to return to Quantitative Easing if the data warrants it. In fact the Fed is currently expanding its balance sheet by $60 billion a month by buying Treasury bills and monetizing the debt. If the Fed returns to a major Quantitative Easing program gold is expected to rise in price.
Since WWII the U.S. has had two bull markets in gold. During the first bull market gold went from $35 per ounce in 1969 to $667 per ounce in 1980. During the second bull market gold went from $255 per ounce on August 1999, to $1,820 on August 2011. If the Fed returns to QE we can expect a third bull market in the price of gold. Gold was $1,060 on Dec. 2015 and we can expect the next bull market to take out the previous high and go over $2,000 per ounce, during the next recession. For each 1% increase in the price of gold, tier one gold producers such as Barrick Gold and Newmont Mining often increase in price by 2 or 3%, because of the leverage of increased revenues. However, in the last gold bull market, a junior mining company, Gold Resources Corporation, increased in price per share by 10X, from $3.40 to $28.74. I am currently long Gold Resources Corporation (GORO)