Market Insights

Soft Landing or Financial Storm for 2024?

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Will we see a recession or a soft landing in 2024?

US Treasury Secretary Janet Yellen has declared victory for the Fed. 

In a CNN interview last Friday, she announced a “soft landing” for the economy—a scenario once considered only “possible.”  

And she may be right.  

After all, the Fed’s 11 steep rate hikes cooled inflation, and the US labor market remains robust with low unemployment.  

According to the Bureau of Labor Statistics, 216,000 jobs were added in December 2022—56,000 more than expected. Plus, consumer confidence and spending remained high in 2023, which helped fuel investor optimism and boost markets. 

However, some experts say a recession is still possible… 

Deutsche Bank’s head of global economics, Jim Reid, says talk of a soft landing “is not unusual before recessions,” and “Despite all the signs pointing to a soft landing, history provides reasons for considerable caution.” 

During testimony before a Senate Banking Committee hearing, JPMorgan Chase CEO Jamie Dimon said, “Be prepared.”   

And Citibank CEO Jane Fraser said, “…we do expect a recession.” 

So, have we achieved a soft landing?  

Or are economic storm clouds brewing on the horizon? 

Because despite Yellen’s optimism… 

One of the world’s most reliable recession indicators is flashing red, and it has been for months.  

As you may know, interest rates for government bonds are the yields (profits) the government pays to bond investors.  

Most of the time, longer-term bonds pay higher yields than short-term bonds because investors expect a financial reward for letting bond issuers keep their investment money for longer. 

But under rare economic circumstances, short-term yields rise above long-term yields. This means the government pays more to holders of short-term bonds than to holders of longer-term bonds.  

This flip-flop is called an inverted yield curve.  

And since 1976, every time the yield curve has “inverted,” a recession has followed in 6–18 months. 

The yield curve inverted in October 2022… 

The yield curve inverted in October 2022.

It’s been inverted since then… 

And if it’s still a reliable indicator, then a recession is now “overdue.” 

When the curve inverted in 2022, the head of fixed income strategy at Bank of America Private Bank, Matt Diczok, said, “The yield curve is definitely telling you a recession is coming. It’s not here yet but the check is certainly in the mail.” 

And while his forecast may not bode well for the economy today, the good news is:

Most of those recessions preceded gold rallies. 

Gold rallied to record levels after the 2008 recession, which followed the 2006 yield curve inversion…  

Gold rallied to another record high after the 2020 recession, which followed the 2019 yield curve inversion…  

And gold hit two record highs in 2023 following the 2022 yield curve inversion. 

Now, Campbell Harvey—the Duke University economist who discovered the yield curve inversion indicator—says, “Given the Fed’s actions of keeping rates too high for too long, I think the probability of a recession has greatly increased.” 

So, the question is: 

Who is right? Janet Yellen… or economists, analysts and bankers who see a potential recession ahead? 

It’s a complex situation with many variables to consider. 

And at this point, America’s economic outlook is still uncertain. 

But in addition to the historically reliable yield curve inversion indicator, more reasons why we may still see a recession exist, including:  

Rising consumer debt and savings depletion:  
Despite high consumer confidence, recent data reveals massive post-pandemic spending has dwindled savings and increased delinquencies in consumer debts like auto loans and credit cards.  

And these factors could lead to a pullback in consumer spending, a critical driver of the US economy.  
Banking sector vulnerabilities:  
The current economic environment has exposed potential vulnerabilities in the banking sector, including issues related to liquidity and commercial real estate. These challenges could lead to tighter credit conditions, affecting both businesses and consumers. 

Global economic weakness:  
The slowdown in China’s economy and ongoing geopolitical tensions present additional risks to the global economic outlook, which can have ripple effects on the US economy. 

The labor market paradox:  
The apparent strength of the current labor market doesn’t shield the economy against future downturns. Periods of strong employment figures have often preceded past recessions. 

Federal Reserve’s interest rate policy:  
The Federal Reserve’s past rate hikes could have delayed effects on the economy. While these measures were aimed at controlling inflation, their full impact on economic growth and consumer spending might only be realized in the months ahead. 

On one hand, evidence suggests resilience and recovery. But on the other hand, several indicators—including the almost-always-accurate yield curve inversion—point to serious potential economic challenges ahead.  

What does this mean for gold owners? 

If the yield curve inversion proves correct, and the added challenges destabilize the economy, investors will face more risk.  

When savvy investors face more risk, they tend to shift funds into lower-risk, highly liquid assets like gold. 

And this may mean we’re seeing a historic gold-buying opportunity unfold in 2024.  

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