We all know that the second quarter was disastrous for the US economy. And now, it is official. Last week, the Bureau of Economic Analysis published the third real GDP estimate in Q2. According to the report, real GDP is an annualized rate of 31.4 percent (slightly better than the second estimate of 31.7 percent decline), or 9 percent higher than the previous quarter and the second quarter of 2019, as the chart below shows . . In other words, the US economy has suffered the fastest contraction since the government began keeping records in 1947.
While this report looks disastrous, as it is also very old news, no one really cares, while market players are always future-oriented and focus on rapid recovery. And indeed, the data is encouraging. For example, the Consumer Confidence Index has risen from 86.3 in August to 101.8 in September, the highest level since the epidemic began.
In fact, some data is somewhat discouraging. For example, September’s nonform payroll fell short of expectations (we’ll discuss this in detail in the future), while the Chicago Fed’s National Activity Index, which measures overall US economic activity, fell from 2.54 in July to 0.79 in August. Gone. This means that the economy is stagnating or slowing down rather than accelerating. Another important index is the New York Recovery Index, a combination of five sub-indices that aims to measure New York’s recovery speed. As stated in the chart below, the index hovers around 50, meaning the city is only half behind pre-epidemic levels.
The sad truth is that the pace of US recovery depends heavily on further stimulus packages. For this reason, Fed officials asked Congress to quickly strike a deal on the next aid bill. Without doubt, there will be a large rebound in the third quarter, but the economy will likely still decline throughout the year. According to the Economist Intelligence Unit, this year, the US economy will decline by 5.3 percent, probably not returning to pre-epidemic levels until 2020.
In other words, a V-shaped recovery will occur. But it will be in China, not in America. China’s COVID-19 suppression hardened in the short-term, but was actually effective in the long-term, as it allowed consumers to revert to their pre-pandemic behavior.
In contrast, the US never had a serious strategy to counter coronovirus. It is not surprising, therefore, that the end of the epidemic in America is still far away. Recently, the number of new cases has been increasing again, as the chart below shows. Even President Trump tested positive for the new virus (we’ll discuss this in detail in the next edition of the seminal Gold Report). And don’t forget that fall has just started – with winter still ahead of us!
And no, waiting for a vaccine is not a strategy. Even if the vaccine is invented by the end of the year, the economy cannot turn around quickly. You see, vaccines must also be delivered and injected, which takes time. Authorities may try to speed up the entire process, but its rapid implementation may result in ineffectiveness, or worse, some serious side effects. In addition, a large part of society may refuse vaccination, given the high uncertainty related to Kovid-19 and the final vaccine against it.
Implications for gold
What does this mean for the gold market? Well, just as the second quarter was disastrous for the US economy, it was also good for the gold market. And just as the third quarter was better for the economy that had partially rebounded, it was worse for the yellow metal, which went back above $ 2,000 to below $ 1,900, as indicated by the chart below.
However, given that the epidemic is not yet over and the road towards full recovery will be long and bumpy, with stimulus packages ahead along the way, it seems that the recent reform was just a good one, a long one. A short-term improvement in duration – Bull Bull Market instead of big reversal.
Investors should not forget about changes in the Fed’s monetary regime. Even though gold has not increased or fallen, the Fed’s immediate reaction to the change in strategy does not matter. You see, contrary to the widespread practice of market analysts, strategic movements should not be judged based on the response of existing financial markets. Strategic political decisions, such as the Fed’s significant changes to its monetary structure, are slow to function over time and bear fruit. Given that the discussed shift means lower real interest rates and greater tolerance for higher inflation, gold should benefit in the long run.